Research Report RAISING THE ROOF: Ju ly. 2013 Are Triad logo - HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
THE CARBON WAR ROOM
Operation Lead: Joshua Kagan
Senior Fellow: Murat Armbruster
Fellow: Sara Barnowski 02 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Y. H P eoul) S HOTOGRA P e Center, m o H HORNER
el d OHN : J AGE sung Mo M I m , a S GE ( A P AA A D THIS NA
y ture b c hite c Y. ar Y. H P HOTOGRA P HORNER
OHN : J AGE M I
ER V O C
Raising the Roof: How to Create Climate Wealth Through Efficient Buildings
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www.carbonwarroom.com Carbon War Room Research Report – 2013 03 Contents
A LETTER TO OUR READERS 04 POLICY 44 45 What Role Does Policy Play? EXECUTIVE SUMMARY 06 48 Benchmarking and Disclosure Rules 07 Key Insights 48 Point-of-Sale Auditing
INTRODUCTION 10 DEMAND AGGREGATION 50 11 Motivation 12 Transformational Impact LESSONS LEARNED 54 13 Benefits of Energy Efficiency 55 From Concept to Deployment: 14 Key Barriers A Progress Update on the PACE Commercial Consortium 14 What Has Been Done So Far?
TECHNOLOGY 16 CONCLUSION 56
17 Assessing a Building’s Starting Position WORKS CITED 17 Recognizing the Challenges 58 18 Determining an Economic Model 55 Industry Resources 20 Step 1: Benchmarking 56 Whitepapers 21 Step 2: Auditing ACKNOWLEDGEMENTS 23 Step 3: Implementation 63 24 Step 4: Retrofit Implementation
FINANCE 26 27 Energy Services Company (ESCO) 28 Efficiency Service Agreements (ESAs) 32 Third-Party On-Bill 35 Assessment Finance 43 Risk Mitigation
www.carbonwarroom.com 04 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS A Letter to Our Readers
www.carbonwarroom.com Carbon War Room Research Report – 2013 letter 05
Amigas y Amigos,
Climate change presents one of the greatest challenges in human history—a challenge that transcends national boundaries, income, ideology, race, and ethnicity. Overcoming that challenge will result in one of the greatest wealth creation opportunities ever—a modern industrial revolution that could radically reshape society and our planet. The world can no longer afford to be intimidated by the magnitude of the climate crisis, nor into believing that we must choose between economic prosperity and environmental security.
The Carbon War Room takes a global, sector-based approach. Our mission is to accelerate the adoption of proven clean technologies and innovative business models in order to achieve profitable, gigaton-scale reductions of carbon emissions. One sector in which the Carbon War Room is actively engaged is Energy Efficiency in the Built Environment (EEBE)— a sector with an estimated market potential of $87 billion per year, and an equally substantial opportunity to reduce greenhouse gas emissions.1 In 2010, the Carbon War Room launched the Green Capital Global Challenge (GCGC) to help cities around the world use innovative mechanisms to support energy efficiency in their built environments, thereby bringing capital, energy technologies, and jobs to their citizens in a sustainable and profitable way. Having concluded the GCGC, we are now, with this paper, able to share the insights we gained over the course of that Challenge with cities and building management groups around the world. We hope that this information will be used to stimulate new initiatives or accelerate existing initiatives in readers’ own cities.
This publication, “Raising the Roof: How to Create Climate Wealth Through Efficient Buildings”, is a collection of observed global best practices as they relate to finance, technology, and policy. Whether discussing San Francisco’s benchmarking ordinance, the UK’s Green Deal, or Melbourne’s 1200 Buildings program, this guide is meant to provide real estate owners, capital providers, entrepreneurs, and policy makers with a point of reference on how energy efficiency projects are currently working (or not) around the world. We also provide a selection of further resources to facilitate more in-depth research.
Our work on energy efficiency continues as an active project at the Carbon War Room. Please stay or get in touch with us to let us know how we can help you.
Best Regards,
José María Figueres, President, Carbon War Room
1 Robins, Nick, Charanjit Singh, Robert Clover, Zoe Knight, and James Magness. “Sizing the Climate Economy.” Rep. N.p.: HSBC Global Research. 2010.
www.carbonwarroom.com 06 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Executive Summary
www.carbonwarroom.com Carbon War Room Research Report – 2013 Executive summary 07
EXECUTIVE SUMMARY KEY INSIGHTS
T he implementation of measures to achieve EEBE The Context (Energy Efficiency in the Built Environment)—whether on a building-by-building basis or in a portfolio • Emissions: Globally, buildings are responsible for 40 percent of energy 2 of buildings—is a multi-step process involving consumption and 33 percent of CO2e emissions. In the wealthier cities of the benchmarking, auditing, implementation, measurement industrialized world, most of that energy is used by residential and commercial and verification, and ongoing commissioning.W hile it buildings for lighting and temperature control.3 is generally accepted that most buildings leak energy, and that most asset owners leave money on the table • Market size: HSBC estimates that the total size of the current EEBE market is $87 by not undertaking efficiency retrofits, inertia is a billion per year today, and the potential market in 2020 to be $245 billion per powerful force, causing stakeholders to stick with the year.4 The US, China, France, Germany, and UK currently account for 75 percent status quo rather than enter the unchartered waters of the global EEBE market.5 McKinsey forecasts potential US savings of $1.2 of EEBE projects. Compounding that inertia is a trillion against an investment of $520 billion by 2020. Such savings represent a historical lack of private capital to finance retrofits, a reduction in energy consumption of 9.1 quadrillion BTUs, which would prevent
“split-incentive” barrier, and a persistent uncertainty the release of 1.1 gigatons of CO2e emissions each year. as to whether substantial savings will actually be realized through energy efficiency upgrades. It is Key Barriers thus understandable why so few projects have been completed relative to EEBE’s potential to generate • Misaligned financial incentives: A significant “split-incentive” challenge exists savings. in buildings in which the landlord does not pay the energy bills of the property. Simply put, tenants are often unwilling and/or unable to incur the upfront Implementing EEBE projects offers a myriad of capital expenditures of implementing a retrofit, as they will not necessarily benefits, including, but not limited to, direct bill capitalize on those long-term savings. At the same time, building owners are savings, increased comfort, higher productivity, strong often unwilling to pay for efficiency measures given that they will not accrue a paybacks on investment, and the reduction of carbon short-term benefit from the resultant lower energy bills. This split incentive is emissions. Any attempt to demystify and otherwise one of the single biggest obstacles to EEBE across sub-sector and geography. help to accelerate the EEBE industry is timely. In working with 30 global cities over the past three years, • Upfront capital costs: Comprehensive energy efficiency retrofits that result the Carbon War Room has found that the current in 20 percent or higher reductions in energy consumption often require a finance, technology, and policy conditions are sufficient substantial upfront investment. Building owners might not have the ability to to unlock hundreds of billions of dollars of capital finance the upfront capital expenditure. for EEBE projects across the world—the challenge is working out how to get it done quickly and on a large • Associated risk: Though upfront costs are a problem, large amounts of capital scale. are, in fact, currently available for EEBE programs. That capital is not being accessed because many types of EEBE investments and asset classes are new to the market, so the perceived risk associated with such investments is high. The risk can be mitigated, however, through more data, innovative insurance packages, and inserting credit enhancements into the financing structures.
• Lack of information: Often, building owners lack the time, knowledge, and/ or the capacity to differentiate between substance and noise when it comes to the available retrofit opportunities. Many building owners are not aware of the data and reports illustrating that more efficient buildings result in higher tenant occupancy rates, lower operating expenses, and lower default rates. Many building owners are not aware of the data and reports illustrating that more efficient buildings result in higher tenant occupancy rates, lower operating Y.
H expenses, and lower default rates. P
• Legal/structural challenges: Many buildings have mortgage covenants in
HOTOGRA place that prevent the incursion of further debt or changes to the structure
P of the building without explicit consent of the lender. Furthermore, some buildings may be unable to incur additional debt due to their being owned 2 http://www.usgbc.org/DisplayPage.aspx?CMSPageID=2124
HORNER 3 as Special Purpose Vehicles (SPVs), which lack additional assets that could http://www.rrojasdatabank.info/statewc08093.4.pdf 4 http://earthscience.bcsdk12.org/earthscienceiscool/media/climatechange/ serve as collateral.
OHN documents/2010%20Financing%20Energy%20Efficiency%20Building%20Retrofits. : J pdf 5
AGE http://www.pikeresearch.com/research/energy-efficient-buildings-global- M
I outlook
www.carbonwarroom.com 08 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
www.carbonwarroom.com Carbon War Room Research Report – 2013 Executive Summary 09
• Undervaluing energy efficiency: Competing priorities, such as the need to • Demand stimulation and aggregation: The purchase new assets or to make other improvements in a building can divert widespread adoption of energy efficiency requires available capital away from energy efficiency, sinceEEBE projects are not aggressive marketing and outreach programs in often seen as a priority compared to “core business” needs. order to both stimulate and aggregate demand— however, many proponents of EEBE seem to treat • Inertia: There is a tendency for energy efficiency measures to be deployed such programs as non-core activities in relation to in a reactive manner, that is, to be only deployed when an existing piece of their efforts.EEBE demand has often been treated equipment fails. This results in a sub-optimal outcome in which substantial with a “if we build it, they will come mentality” – savings are missed, as the largest savings can be achieved when owners take which clearly has not worked. Strong consideration a holistic, systems-wide perspective, addressing all aspects of their building to demand aggregation needs to be strategized at once. at the beginning of any large-scale project and implemented with sufficient resources. • Embryonic markets: While energy efficiency has been widely described as “low-hanging fruit” for 30 years, the world still lacks a vibrant marketplace • Process improvement: In the public sector (and for funding EEBE projects, and securitization of off-balance-sheet finance parts of the private sector where EEBE would be has not yet taken off. Despite its immense promise, energy efficiency is still considered non-core) buyer sophistication and time at an immature stage relative to other cleantech sectors like solar, wind, and available are limited, and procurement policy can be biomass. restrictive. Process improvement that, for example, pre-approves suppliers and spells out clear action Key Opportunities steps can yield significant and accelerated results. An example is London’s RE:FIT program, which is now • Technology: In the last several years, a whole suite of “big data” products being rolled out nationally across the UK.7 for EEBE have been developed and profitably deployed; these technologies range from ones that simply track how energy has been or is currently being consumed (assisting with benchmarking, retro-commissioning, and audits) to more robust measures that use analytics to optimize energy consumption patterns (optimization, demand response, etc.). Many of these software solutions often do not require any upfront hardware expenditures and can save building owners 3–15 percent of their energy costs, which represents tens of billions of dollars of savings globally.
• Finance: 2013/14 will be a transitional and transformative period for energy efficiency finance as several innovative schemes likeA P CE, The largest on-bill, and Energy Savings Agreements (ESAs) enter post-launch phase and expand their scope and scale. The opportunity for savings can be energy efficiency to be included in Master Limited Partnerships (MLP) and designated as a Real Estate Investment Trust (REIT) achieved when could also greatly enable new pools of capital to invest into efficiency projects. owners take a holistic, systems-wide • Policy: While many national governments are using top-down approaches to EEBE, the Carbon War perspective, Room also found many compelling examples of local municipalities using the legal and policy levers at their addressing all aspects disposal, as well as regional/multi-national efforts that galvanize Y.
H nations to act. For example, at the national level, Singapore has of their building P recently instituted the Energy Conservation Act, Australia launched its NABERS benchmarking scheme, and the UK published its “Energy at once 6
HOTOGRA E fficiency Strategy”. At the sub-national level, various US states have
P passed “decoupling” laws, which enable utilities to obtain remuneration from alternative sources besides simply selling the most energy. On the
HORNER macro level, the European Union has an upcoming Energy Efficiency
Directive, which will require regular energy audits across all large businesses OHN
: J in the region. 6 https://www.gov.uk/government/uploads/system/uploads/attachment_data/
AGE file/65602/6927-energy-efficiency-strategy--the-energy-efficiency.pdf
M 7 I http://www.refit.org.uk/
www.carbonwarroom.com 10 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Introduction
• Energy Efficiency in the Built Environment (EEBE) represents one of the most cost-effective means of combating climate change, and also one of the most significant opportunities for economic growth in the 21st century.
• EEBE projects could help buildings achieve as much as an 80 percent reduction in energy use.
• There are many challenges that have limited the number of EEBE projects and programs around the world to date.
• Solutions to these challenges already exist and are possible to implement under current political, technological, and economic conditions.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Introduction 11
Motivation box 1 2008 marked the first year in history that the majority of the human population lived in cities, and the pace of urbanization is only accelerating. Ensuring that Energy Efficiency 101 the urban centers of the world minimize their environmental impacts will become increasingly central to any efforts to combat climate change.T he Energy efficiency is often associated with main feature of a city is its buildings, and the buildings in which we live, work, conservation and sacrifice, but the truth is that and play are responsible globally for over nine billion tons of man-made improving energy efficiency simply means 8 carbon dioxide equivalent (CO2e) emissions each year (see Figure 1). getting more benefits out of the energy that This means that emissions from our residential and commercial buildings we use. Advances in building materials and 9 are responsible for a full 8 percent of our global CO2e output annually. technologies from the last few decades make it Fortunately, solutions and technologies exist today that can increase the possible to use smaller amounts of energy while efficiency of the way those buildings consume energy (see Box 1), reduce maintaining the same lifestyles and comfort their demand for energy, and otherwise optimize building systems. The Built levels we’re used to in our buildings. And Environment sector represents an important opportunity for implementing upgrading to improved, more efficient systems cost-effective solutions to climate change, and the implementation ofEEBE ultimately generates substantial monetary has the potential to generate substantial amounts of new revenues for our savings via reduced utility costs. cities and create millions of new jobs for their citizens. Energy efficiency improvements are possible in all Built Environment sub-sectors: commercial, residential, industrial, and the MUSH Figure 1: Global CO e by Sector10 (municipal, university, school and hospital) 2 market. The partners mentioned in this report have predominantly focused on retrofits and Waste and wastewater7) renovations for existing commercial, residential, 2.8% and multi-family buildings. In commercial buildings, energy savings of up to 50 percent Forestry6) have been shown to be feasible with even low 17.4% Energy Supply1) 25.9% levels of investment, and extra savings are possible with additional investments. Since approximately 75 percent of the buildings that will exist in the large cities of the world in the year 2050 have already been built today, addressing the energy efficiency of our pre-existing building stock is an important Agriculture5) endeavor. We cannot simply wait for new 13.5% advanced new buildings to be built—we must improve the buildings that we have.
Transport2) 13.1% Industry4) 19.4%
Residential and commercial buildings3) 7.9%
8 Intergovernmental Panel on Climate Change. 9 http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter1.pdf Source: http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter1.pdf 10 IPCC—http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4-wg3-chapter1.pdf
www.carbonwarroom.com 12 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Figure 2: McKinsey Cost Curve Gas plant CCS retrofit Coal CCS retrofit Iron and steel CCS new build 80 Low penetration wind Coal CCS new build 70 Cars plug-in hybrid Powerplant biomass Residential electronics co-firing 60 Degraded forest reforestation Reduced intensive Residential appliances Nuclear 50 agriculture conversion Retrofit residential HVAC Pastureland afforestation High penetration wind 40 Tillage and residue mgmt Degraded land restoration Solar PV nd
e 30 2 generation biofuels Solar CSP 2 Insulation retrofit (residential) 20 Building efficiency Cars full hybrid new build 10 Waste recycling 0 10 15 20 25 30 35 38 -10 Organic soil restoration -20 Geothermal Abatement potential GtCO e per year -30 Grassland management 2 Reduced pastureland conversion -40
Abatement cost $ per tCO cost Abatement Reduced slash and burn agriculture conversion -50 Small hydro -60 1st generation biofuels -70 Rice management -80 Efficiency improvements other industry Electricity from landfill gas -90 Clinker substitution by fly ash -100 Cropland nutrient management Simply put, -110 Motor systems efficiency it is cheaper to -120 Insulation retrofit (commercial) Lighting - switch incandescent to LED (residential) -130 capture energy that would otherwise escape Source: McKinsey & Co. or be wasted through inefficiency than Transformational Impact it is to build new Out of all the clean technology being touted today, technologies energy generation that improve the energy efficiency of the Built Environment sector offer the most economically effective method of reducing capacity energy costs and greenhouse gas (GHG) emissions, as they allow us to reduce our energy demand simply by upgrading and optimizing existing systems. Unlike other cleantech options, EEBE technologies do not require us to make any significant changes to our energy transmission systems, to the composition of the electricity mix, or to the comfort levels of In the United States, potential energy savings from building occupants. Simply put, it is cheaper to capture energy that would efficiency measures would reduce annual electricity otherwise escape or be wasted through inefficiency than it is to build new consumption in the residential and commercial Built energy generation capacity. Environment sector by over 695 billion kWh annually, translating to a savings of over $78 billion per year on the Research has shown that, through the implementation of existing, proven electricity bills of American consumers and businesses EEBE technologies and practices, global electricity consumption could be (based on electricity prices of 11 cents per kWh).12 Thus, reduced by about 20–30 percent in the next 10–15 years. Figure 2 maps energy efficiency upgrades for buildings offer a relatively many existing clean technologies from many sectors according to their cost-effectiveness. On the left-hand side of the McKinsey Cost Curve are the technologies that are cost-negative GHG reducers—that is, they actually save 11 H ayes, Sara, Steven Nadel, Chris Granada, and Kathryn Hottel. “What Have We Learned money for every ton of GHG they reduce. Most notable is that many of the from Energy Efficiency Financing Programs?” Rep. no. U115. Washington, DC: American 11 Council for an Energy-Efficient Economy. 2011. technologies on the left-hand side of the curve are EEBE options. 12 Ibid. 13 https://www.gov.uk/government/publications/energy-efficiency-opportunities-in-the-uk
www.carbonwarroom.com Carbon War Room Research Report – 2013 Introduction 13
Figure 3: Energy Efficiency Potential in US Benefits of Energy
End-use consumption, Efficiency quadrillion BTUs Asset owners, in particular, have much to gain from taking steps to increase the energy efficiency of their 39.9 36.9 buildings. On top of the presumed savings that will result 30.8 -23% from their decreased energy use, efficient buildings tend Industrial 19.3 29.5 to have higher rental premiums. According to a study 16.9 -18% by Nils Kok and the University of California, Berkeley, Commercial 6.7 8.0 “an office building registered withLEE D or ENERGY 5.7 -29% STAR® rents for a 3 percent premium, on average. Residential 10.9 11.4 8.2 -28% Labeled buildings have effective rents that are almost 8 percent higher than those of otherwise identical nearby Baseline Baseline NPV-positive 14 case, 2008 case, 2020 case, 2020 non-rated buildings.” Another recent study sponsored by the Royal Institution of Chartered Surveyors shows that “ENERGY STAR®-rated buildings command a sale premium of 16 percent on the building aggregate.”15, 16 Primary consumption, quadrillion BTUs1 In addition, performing energy efficiency upgrades may reduce the frequency and cost of required maintenance, which would save asset owners money in the long term. 70.8 64.7 “Reducing your facility’s load allows existing systems to operate less frequently and newer systems to be 17 52.4 -26% designed smaller, thereby lowering operating costs.” 28.3 Industrial 27.2 Furthermore, research has shown that by conducting 22.4 -21% efficiency upgrades asset owners are creating a more 20.0 comfortable work environment for their tenants, and Commercial 16.3 this can result in performance gains. “A deep retrofit 13.6 -32% that successfully addresses occupant comfort issues, primarily related to ventilation, temperature and lighting, Residential 21.2 22.5 16.5 -27% is estimated to add $3 to $30 per square foot to the value of office space for the occupant, based on the potential for productivity gains of 1 to 5 percent.”18 Specifically, Baseline Baseline NPV-positive Greg Kats of Capital-E found that productivity increases case, 2008 case, 2020 case, 2020 in commercial buildings averaged 3.3 percent from improved indoor air quality, 5.5 percent from improved temperature control, and 3.2 percent from the installation of high-performance lighting systems.19 Source: McKinsey & Co. Finally, energy efficiency upgrades may confer additional soft benefits to asset owners, such as the marketing and publicity value of “greening” a building. This has the potential to provide a competitive advantage among straightforward means of obtaining significant energy and cost savings, and similar asset types. should appeal to both municipal leaders and asset owners. In the United Kingdom, according to their recently released “Energy Efficiency Strategy”, cost-effectiveEEBE measures would obviate the need to build 22 additional power stations.13 (see Figure 3) 14 Eichholtz, Piet, Nils Kok, and John M. Quigley. “The Economics of Green Building.” Working paper no. W10–003. Fisher Center for Real Estate and Urban Economics & UC Berkeley. 2011. 15 “BenefitsB eyond Energy Cost Savings.” Rocky Mountain Institute. 1 February, 2012. http://retrofitdepot.org/BenefitsBeyondEnergySavings 16 http://cbey.yale.edu/uploads/Environmental%20Economics%20Seminar/ EKQ%20082010%20JMQ%20(2).pdf 17 “ HVAC Systems | SBA.gov.” The US Small Business Administration | SBA.gov. 1 February, 2012. http://www.sba.gov/content/hvac-systems 18 “BenefitsB eyond Energy Cost Savings.” Rocky Mountain Institute. 1 February, 2012. http://retrofitdepot.org/BenefitsBeyondEnergySavings 19 Ibid.
www.carbonwarroom.com 14 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
What has been done so far?
Besides the cases of some forward-thinking cities, there have been few While the Carbon War Room supports all such policy coordinated efforts to incentivize EEBE across a municipality or district. the efforts to date, it focuses particularly on the emerging most common policy mechanisms for EE range from rebates, grants, tax solutions for technology and finance that allow asset credits, accelerated depreciation allowances and energy service contracting owners to make efficiency improvements with limited (ESCOs). Some innovative municipalities are pursuing Property Assessed Clean or no upfront cost and without dependency upon Energy (PACE), and on-bill financing while others are thinking about what government grants or financial incentives.T he Carbon types of credit enhancements could be used to leverage private investment. War Room believes that the energy efficiency “stool” While rebates and tax credits have made it possible for some projects to move requires the three legs of technology, capital, and forward, they have significant problems and restrictions. Rebates, in particular, policy to stand. This paper begins with the section are merely band-aid solutions that only incentivize one-off investments in that enables us to peek into the soul and guts of a specific pieces of equipment, rather than providing the impetus for a systems- building: technology. wide analysis that can identify the opportunities for a comprehensive and “deep” retrofit. Moreover, both rebates and direct grants, as direct or indirect About This Paper government subsidies, perpetuate the myth that carbon abatement is only profitable with government incentives, and therefore would not be profitable This guide begins with an explanation of technologies if those incentives were taken away. Table 1 highlights some of the popular that do not require upfront hardware investments but government incentive schemes in the US in 2007. that could yield energy savings in excess of 15 percent. Although such technologies have diverse names like optimization, retro-commissioning, and auditing, this paper attempts to sub-divide only by tangible and Table 1: Types and Participation Rates of actionable options. These technologies enable the Local Incentives, United States: 2007 building owner to understand how their buildings are consuming energy, which is the basis for being able to Types of Incentives Percent conduct a comprehensive retrofit.
Incentive payment from a utility energy efficiency program 57% W hen the technology is well known, often it is sourcing Direct monetary payment from a city or county (grant, rebate or 52% the upfront capital for a retrofit that remains a significant reimbursement) obstacle. The following section highlights existing and emerging finance mechanisms like performance Expedited permit processing 36% oston) contracting, assessment finance, on-bill repayment, B
Marketing/publicity/awards 35% and Energy Savings Agreements. The last main section ing, covers the best global policies the Carbon War Room d uil State income tax credit 29% has seen for stimulating private sector adoption and B investment of energy efficiency.
Property or sales tax rebates or abatements 22% llen cA Density bonus 21% The paper concludes with some remarks on demand aggregation, as well as highlighting areas where the (Ma Access loans/loan funds 17% dA Carbon War Room project team has gained traction e c i Full or partial refunds for development fees 9% and achieved impact; and equally where it has run in to Off
obstacles—noting some of the lessons learned along the y Source: National Association of Industrial and Office Properties Research Foundation. way that may be of service to others on a similar path. ture b It is important and obvious to note that this guide, while c hite
intending to cover much ground, does not aim to be c One government-led yet market-based mechanism that has been successful in the last word on energy efficiency policy, finance, and Y. ar Y.
helping to drive EEBE projects is that of regional cap-and-trade systems. These technology. Rather, the Carbon War Room hopes that H systems provide voluntary, market-based incentives for significant and continual it will stimulate ideas and provide tangible resources for P improvement. However, they are difficult to administer, they sometimes allow you to create change at the speed and scale required in
for free-riding, and their ultimate success is dependent on policy decisions and your chosen field, helping us all to realize the economic HOTOGRA
appropriations. One of the most successful of these so far has been the New and environmental benefits of Energy Efficiency in the P England Regional Greenhouse Gas Initiative (RGGI). On January 1, 2013, California Built Environment.
launched its cap-and-trade scheme, which is already among the largest in the world HORNER
yet does not allow EEBE projects to be counted in its compliance offset category. OHN : J AGE M I
www.carbonwarroom.com Carbon War Room Research Report – 2013 Introduction 15
Deep retrofits have been estimated to add $3 to $30 per square foot to the value of office space based on decreased operating costs and higher occupant productivity
www.carbonwarroom.com 16 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Technology
• Each building has a unique starting position that must be assessed in order to determine the best course of action for implementing energy conservation measures.
• The process for implementing energy efficiency measures is well ordered, progressing from benchmarking to auditing, to implementation, and finally to capital upgrades.
• The savings garnered from using an ordered building optimization approach, coupled with the savings from capital retrofits, allow external financial institutions to assist with financing for deeper retrofits.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Technology 17
A ssessing a Building’s Starting Position Recognizing the Challenges
T here is no one-size-fits-all solution for improving a building’s Challenges in energy efficiency projects typically hinge on economics—not because the performance through technology upgrades. Every building numbers are unattractive but rather because the costs and associated benefits do not has unique potential and limitations. A building owner must accrue to the same stakeholders, creating a situation of split incentives, wherein owners, assess their building’s “starting position”, taking stock of the managers, and tenants each have a different relationship to investments in energy building’s systems and operations, and assessing what, if any, efficiency.W hile the precise relationships among these stakeholders will vary from energy efficiency measures have been implemented to date, building to building, each project ought to always consider who gets what benefits, when, as Figure 4 illustrates. Ideally, the starting position is captured and how. Generally, the challenge comes down to owners who see little reason to spend as part of a “gap analysis” associated with a Strategic Facility money on upgrades that will only save their tenants’ money on utility bills. Property and Plan,20 which maps the goals of a facility’s use against the facility managers can also be part of this challenge, as they are often conservative in their business objectives. These simple questions will help building assessments of the risks of any new technologies, and/or may discount the operational owners to understand their starting positions: or behavioral benefits to be gained from improving their building’s energy management. Understanding the stakeholder ecosystem of a building and how it translates to decision 1.H ow old is my building and when was it last upgraded? making on energy efficiency is fundamental to successfully prioritizing efforts and 2.H ow old are the control systems? Is there a building allocating resources in an attempt to implement an EEBE project. automation system (BAS21) and what is connected to it: major heating, ventilation and air conditioning (HVAC) Other challenges will be enumerated by the gap analysis or elicited by the starting systems; zone-level systems; lighting? position assessment questions listed above. Most of the “gap” will be found in less- 3. When were the building’s systems last tuned? automated buildings (e.g., pneumatic zones), systems-integration challenges with 4. What are the building’s costs per square foot? the current building automation system (e.g., no support for open communication protocols), lack of uniform standards for interpreting data, or lack of information Answers to these questions will illuminate a building about the building. Challenges also arise when facilities’ staffs are ill equipped or owner’s options for energy efficiency measures and will over-tasked. establish the starting position from which they will be 20 http://www.ifma.org/files/resources/tools/SFP_WhitePaper.pdf working to optimize their building’s performance. 21 BAS is another term for a building’s control system—which is a computerized, intelligent network of electronic devices designed to monitor and control the mechanical, electronics, and lighting systems in a building.
Figure 4: Energy Efficiency Loading Order
The order is important—focus on what you have, first!
Renewables
Conservation
30–40% Savings (Pike Research) Retrofit/ Upgrade
12–20% Savings (LBNL)
Implement ECMs cumulative Value (Energy Savings) (Energy Value cumulative
Audit
Time Source: SCIenergy.
www.carbonwarroom.com 18 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Y. H P Determining an economic model Figure 5.
From Commissioning to a Retrofit HOTOGRA A crucial but oft-overlooked part of getting started with an efficiency retrofit P is the development of the economic model that will support the upgrade. This
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economic model involves more than simply assessing the stakeholder value chain Step 1: and establishing the level of investment or the budget. Decision makers must also
Benchmarking OHN
consider the following: : J • What are the decision criteria for pursuing various measures? Perform a whole-building AGE M • What accountability mechanisms exist to ensure performance? analysis to identify I • Will the efficiency measures result in continual and increasing future savings or a building’s baseline merely realize an immediate one-time gain to the bottom line? “starting position” and • What is the desired ROI or payback period?How will this be measured and relative performance, communicated to the stakeholders? and to identify areas These questions will help guide asset owners towards solutions that offer the in need of further greatest possible benefits to their particular buildings. investigation Implementing the Upgrade
The Carbon War Room has worked with building technology companies to develop a step-by-step process for not only assessing a building’s current performance Step 2: and calculating the economic opportunities of an efficiency upgrade, but also for Auditing choosing the most appropriate technologies for a given building and determining the easiest order of implementing such changes. Perform a detailed analysis of the systems Our methodology for energy efficiency improvement focuses on energy consumption, in the building to identify as opposed to simply energy cost savings. The latter can be achieved not only through easy energy conservation upgrades but also through demand response programs—which are often mistakenly measures (ECMs), often referred to as “energy efficiency” as well. However, such usage curtailment typically called “low-/no- requires occupant sacrifice through pre-cooling, thermostat setbacks, and lighting cost” projects changes, and these options run counter to the very notion of energy efficiency. Consumption that is seemingly reduced in peak periods by these methods is, in actuality, mostly just moved to off-peak periods. While there may be a carbon benefit of demand response, as less-efficient peak generation plants are used less frequently, this practice is not considered as being “energy efficiency” by this paper. Step 3: The recommended process for EEBE outlined here will result in true energy savings Implementation and will require no sacrifices on the part of tenants.T he Carbon War Room’s process, Implement ECMs; in a nutshell, emphasizes first optimizing with what you have (via energy efficiency measure and verify the improvements), and only then considering steps such as changing the building (via energy consumption envelopes, renewables, etc.) and asking occupants for behavioral modifications. reduction that
results The process for implementing energy efficiency measures is well ordered, as each step has clear prerequisites, and progressively enhances energy and systems performance. The steps are shown in Figure 5. Step 4: The building performance industry is clearly evolving to recognize the need to set Capital Upgrades carbon reduction goals, both for environmental and economic reasons. Energy Leveraging the savings efficiency—including optimization and retrofits—is the logical starting point in (and other financing) along this process, and there are advantages to approaching the process in the order with the detailed model of the described here. Other initiatives, including conservation, renewables, and even building’s operation garnered demand response, may be implemented after these, and may also be important by the preceding three steps, elements both in a company’s strategy and in our global efforts to mitigate the a building owner can threat of climate change. consider more expensive efficiency measures Because the process is designed with the understanding that each building has a unique starting position, a building owner may in fact start at any step along the continuum in Figure 5. For example, a building that has already been benchmarked could begin by conducting a retro-commissioning audit, assuming that the original benchmarking data is accessible.
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Figure 5. From Commissioning to a Retrofit
www.carbonwarroom.com 20 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Step 1: Benchmarking
T he foundation step of any energy efficiency plan is benchmarking. In the United States, a joint program between the US Department of Energy and the Benchmarking commercial Buildings... US Environmental Protection Agency (EPA) called can yield 5% energy consumption savings ENERGY STAR® defines benchmarking as “a process that either compares the energy use of a building or ...if all commercial buildings group of buildings with other similar structures, or take this simple step looks at how energy use varies from a baseline.”22 As a compliment to the ENERGY STAR® program, the US 5% translates to 11% EPA offers a Portfolio ManagerB enchmarking Tool, at coal-fired plants available at www.energystar.gov. This tool provides an energy performance score on a scale of 1 to 100, We could remove with 100 being the most energy efficient and 1 being the least. This score represents a percentile ranking 52 coal plants compared to the overall national building stock. An ENERGY STAR® certification is awarded to buildings ...nearly that score 75 or above, indicating they are in the top 29 million tons GHG per year 25 percent of buildings across the nation. Source: EIA Commercial Non-Mall Consumption Data A building’s energy use represents the single largest (CBECS 2003) and US EPA Clean Energy: Calculations and References factor in determining its overall environmental sustainability. Recognizing this, the US Green Building Council’s LEED for Existing Buildings rating system (LEED-EB) incorporates the aforementioned ENERGY STAR® score as both a prerequisite and as a source of credit points for LEED green building certification. For example, a building must have a minimum ENERGY STAR® score of 69 to pursue LEED-EB. The ENERGY STAR® score can also provide up to 18 LEED credit points, making it the single largest source of potential points in the LEED rating system. Other countries and regions are beginning to implement programs similar to the LEED certification system in theU nited S tates. While the precise
However, all benchmarking efforts are not relationships among these equal, particularly because they do not always mandate a certain degree of resolution in the stakeholders will vary from collection of energy data. Obtaining the highest building to building, each possible frequency of data collection is critical to reliably determining a building’s baseline. project ought to always More detailed energy data allows for a better understanding of energy load shape, and for consider who gets what the analysis of energy performance relative to weather, occupancy, set points, and schedules. benefits, when, and how Buildings with energy management systems or with continuous meter reporting have an advantage because they are able to automate the process of data collection. While increasing the frequency of data collection can add cost, the granularity of data is truly a key determining factor in successfully achieving and sustaining savings from an EEBE project.
22 “ENERGY STAR® Building Manual.” Chapter 2, Section 2.1. Revised April 2008. http://www.energystar.gov/index. cfm?c=business.EPA_BUM_CH2_Benchmarking 23 FLEX YOUR POWER. http://www.fypower.org/
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box 2 Step 2: Auditing Benchmarking Tools and Market Leaders S tep 1, benchmarking, preferably with highly granular information, gives the owner or operator a sense of the overall performance of their building relative to There are a number of tools available in the other buildings, normalized for influencing factors like weather and occupancy. marketplace that can help building operators S tep 2, auditing, involves undertaking a study of how energy is currently being benchmark their energy performance, implement used in the building in question, along with a set of recommendations on ways tracking of their ongoing consumption, and to improve that building’s energy efficiency and reduce energy costs.23 even engage with their occupants on the issue of energy efficiency. Audits can range in their levels of analysis. The least detailed audit involves simply a preliminary visual examination of a building, such as The American The following companies are a sample Society of Heating Air Conditioning and Refrigeration Engineers’ (ASHRAE) of those that offer tools—including energy Level 1 audit. monitoring/measurement and other analytic functions—for identifying coarse energy savings As with benchmarking, the manner and depth of data collection during an recommendations: audit is highly important, as it will influence the breadth of opportunities identified. To perform a successful audit, data must be collected that describes • FirstFuel, Retroficiency®: These two the specifications, schedule, operating conditions and purposes of all building companies both offer products that use assets, as well as the environment in which the assets operate. Data granularity interval monitoring of energy consumption is, in fact, even more important at the audit stage than during benchmarking, data from users, service providers, or utilities, as it impacts the subsequent design of the measurement and verification plan along with building data derived from an required to ensure sustainability of savings. address to provide benchmarking, monitoring, and energy savings recommendations. Building audits are valuable because they allow for the identification and prioritization of low-cost and no-cost ECMs. The shortcoming of an audit is • EFT Energy, MACH Energy, Pulse Energy, that it reflects only a snapshot of building performance. To effectively optimize SCIenergy®: These four companies all offer energy performance, building operators ought to perform commissioning products for energy management, including exercises regularly. real-time consumption monitoring and visualization of meters and sub-meters. Their products offer varying degrees of analytic functions, custom reports, and dashboards; some of solutions they offer include Turn off the lights automating ENERGY STAR® score calculations, & HVAC when unoccupied... and even the submission of data to the EPA’s Portfolio Manager tool. 20% of buildings use HVAC and lighting outside scheduled • Lucid Design Group™: This company provides hours of operation energy- and carbon-tracking dashboards and kiosks that visualize energy consumption in ways that facilitate employee and/or guest 300 Billion BTUs— engagement, including social networking over 5 Million tons features that compare energy performance of GHG/year across buildings. An easy 2% savings off • Sustainable Real Estate Solutions™ (SRS): This total energy use in company uses its Peer Building Benchmarking commercial buildings database of more than 120,000 buildings, updated regularly, to facilitate the propagation of a benchmarking best practice that http://docs.lib.purdue.edu/iracc/665/ complements ENERGY STAR®’s nationwide Roth, K.W. et al., “The Energy Impact of Faults in US Commercial Buildings.” 2004. rating with local building comparisons across 12 key performance indicators.
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box 3 Notes From the Field Examples of More Building Energy Detailed Audits “Unlike most other industries, building energy management and • ASHRAE Level 2: Energy Survey and Analysis— efficiency has not yet taken full advantage of the economic, social, wherein the auditor will conduct in-depth and environmental opportunities presented by the advent of big data interviews with operating personnel, perform and the transformative power of the Internet. For anyone working in a detailed analysis of energy use by asset type the field of building energy efficiency it is no secret that energy data to quantify base loads, seasonal variation, is difficult to get, and that consistent, normalized, high-quality data and effective energy costs, and evaluate the is extremely rare. Building data is often held in proprietary vendor environment surrounding the assets. Then, silos, although this actually runs counter to the interests of building from that data, they will identify and prioritize owners, managers and occupiers who bear the burden of costly and all ECMs, and also identify promising capital inefficient buildings as a result of the silos.T rusted data, applications, projects for further review. [2–4 weeks] and systems are needed to enable a new market dynamic.
• ASHRAE Level 3: Detailed Analysis of Capital- Our company, Building Energy, faced many obstacles when we started Intensive Modifications (Investment-grade out with the mission to create a global, trusted network of building Audit)—this audit is similar to the above data and applications. Those obstacles included: lack of standards but also provides the further review required around data structures (taxonomies); the lack of methodologies and to justify capital-intensive opportunities transparency on how energy data is extracted, transformed, and and includes a higher degree of monitoring, loaded (ETL) to meet auditability and compliance requirements; data collection, and engineering analysis. and the fact that facilities and sustainability management has not [8–12 weeks] yet been integrated into the information technology infrastructure of organizations. • Traditional retro-commissioning (RCx)24: This systematic method “provides an Building Energy is working to overcome these obstacles by developing understanding of how a facility is operating and an “Internet of Buildings” that makes trusted and secure energy data how closely it comes to operating as intended. aggregation, analytics, and applications possible on a global scale. Specifically, it helps to identify any improper Anyone tasked with managing building assets can now use their own equipment performance, any equipment or data to make better decisions while attracting the best technologies systems that need to be replaced, and/or any and vendors through a dynamic and efficient market based on high- other operational strategies for improving the quality data and applications. An expanding universe of energy performance of the various building systems.”25 software and service providers can find more opportunities and [4–6 months is typically required for utility deliver better solutions in an ecosystem free of the friction caused programs such as these] by the lack of objective, trustworthy data. While many challenges remain in liberating and harmonizing data, we are confident that we will begin to see the gigaton-scale investment into retrofits that the Carbon War Room is helping to catalyze when asset owners have access to accurate and reliable data.”
D. Magnus Cheifetz, CEO, Building Energy
Digital Auditing Tools and Market Leaders
Energy audits have evolved to make use of new software and data capture tools. One of the fastest growing audit types is ‘retro-commissioning (RCx),’ which is expected to grow from 2,000 agents who conduct it in 2010 to over 20,000 globally when the market reaches maturity.26 These types of audits are 24 Retro-commissioning generally proceeds in four phases: planning, designed to capture building data, support energy simulation and modeling, and investigation, implementation and hand-off. Much like a traditional audit, at the end of Phase 2, the engineer performing the retro-commissioning will identify all sometimes even provide an on-going monitoring component. It is extremely energy conservation measures, prioritizing the low-/no-cost measures. important for audits to entail such monitoring of performance after the EEBE 25 “ENERGY STAR® Building Upgrade Manual,” United States Environmental retrofit, in order to sustain identified savings.S uch monitoring is often called Protection Agency, Office of Air and Radiation, 2008 Edition. 27 26 Pike Research. Energy Efficiency Retrofits in Commercial and Public Buildings. monitoring-based commissioning, continuous commissioning,® ongoing (Nock, 2010) commissioning, or persistent commissioning. 27 Continuous Commissioning®, CC® and PCC® are registered trademarks of the Texas Engineering Experiment Station, a member of the Texas A&M University System, an agency of the State of Texas.
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box 4 Step 3: Implementation Technology-Based Tools to Accelerate Market Use of Completing Steps 1 and 2 will give a building owner a full awareness of their RCx or to Amplify Its Benefits building’s baseline energy performance and a detailed understanding of the low-/no-cost ECM options available to them. Most service providers • Cimetrics™, SRS, Facility Dynamics, that conduct either a simpler energy audit or the more in-depth RCx retro- Retroficiency®:A thorough audit will generate commissioning process will provide a detailed written report that identifies a great deal of data, and these providers offer ECMs capable of delivering 12–20 percent energy reductions.28 Step 3 entails software energy models capable of interpreting implementing ECMs found by the audit. By doing so, energy savings will it. ECMs and retrofit measures can be simulated manifest into real reductions in operating capital—that is to say, the building through such modeling, and the predicted owner will see their utility bills decrease. Though ECMs do not require performance outcomes and ROI estimates large outlays of capital, it can still sometimes be a challenge to obtain the that are also generated by the models improve non-monetary resources needed to undertake them, since multiple skillsets, evaluation and decision making. including knowledge of energy, information technology, heating, ventilation and air conditioning HVAC, and building controls, are needed in various • ecoInsight: This solutions provider offers mobile combinations to complete the ECM projects. Often, an external project audit capabilities, integrated product pricing and manager helps building engineers to complete their ECMs, or an ESCO is hired performance information, and sales proposal- to manage and implement the conservation measures. generation tools to professional auditing agents. Information about building equipment, energy Finally, once implemented, a building owner needs to “commission” or verify use, and occupants is collected via a mobile each implemented measure in order to confirm that theE CMs have brought device, making the information immediately about the desired efficiency improvements. It is imperative that a building available for use in analysis, collaboration, owner establish a measurement and verification (M&V)29 plan to ensure the and/or proposal generation. measure achieves its intended energy reduction—most utility programs require this. Periodic monitoring confirms performance and ensures the sustainability • kWhOURS: This tablet-based auditing tool of the improvement. handles the data capture and data management associated with the auditing process. With integral software, tagging, imaging/drawing, and import/annotation tools, the company claims Retro-commissioning (RCx) 16% savings provides that it can save up to 35 percent of the time commercial buildings a 1.1 year simple payback required to complete an audit, along with some of the cost. An office building averages Negates more than • SCIenergy®: Solutions offered by this provider $2.17/sq ft 10 million tons include an automated fault detection and of GHG per year diagnostics tool (SCIwatch®) that uses trend RCx costs data from a BAS or sensor data acquired through $0.30/sq ft a gateway device. The identified faults are useful as they give RCx engineers insight into system 25% of performance, allowing them to target specific assets for deeper investigation. buildings doing RCx...
Source: “Building Commissioning: A Golden Opportunity for Reducing Energy Costs and Greenhouse Gas Emissions.” Mills, LBNL. 2009.
28 “Building Commissioning: A Golden Opportunity for Energy Costs and Greenhouse Gas Emissions.” Mills, LBNL. 2009. http://cx.lbl.gov/2009-assessment.html 29 “M&V is the process of using measurement to reliably determine actual savings created within an individual facility … As savings cannot be directly measured, the savings can be determined by comparing measured use before and after implementation of a project, making appropriate adjustments for changes in conditions.” http://mnv.lbl.gov
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BOX 5 Integrated Tools A Sample of Service T here are a number of firms that have combined activities from benchmarking to Providers Offering RCx auditing to the implementation of ECMs into a single service offering.U sing Integrated Approaches, technology, these firms aim to leverage the data acquired in benchmarking to be more efficient in their building audits.S uch technology typically incorporates and Their Varying some form of monitoring and fault detection, and is also the means by which Proprietary Technologies energy savings are sustained once implemented. In fact, it is now possible to use such technology to combine all three steps—benchmarking, audit and • BuildingIQ—The BuildingIQ System: implementation—into one approach. An integrated approach saves time as The BuildingIQ System offers a solution that well as reduces energy consumption. Accelerating the time to savings can works with BAS that has already been installed positively change the building owner’s return on their investment. For instance, in a building to predict energy demand an integrated approach utilizes the same team to collect and analyze energy and HVAC system parameters in order to data for the benchmarking as for the auditing of the facility, preventing any of continuously optimize energy use. This solution the data from having to be collected twice. The same firm then interprets the improves the efficiency of energy consumption audit or RCx findings, and manages (in some cases) the implementation of the by pre-planning HVAC operations, managing E CMs they identified.T he same team may even provide the M&V for the ECMs. set points, and continuously updating the settings of the HVAC system throughout the Many of the technologies mentioned as applicable to benchmarking can provide day in response to any changes to internal or information about energy and systems performance to retro-commissioning external conditions. agents before they even set foot on site. In other words, an engineer or technician doing the benchmarking step collects data that will be relevant • SCIenergy—Intelligent Retro-commissioning™ to the RCx process, and not just for an ENERGY STAR® score or some other (iRCx™): The iRCx product combines energy consumption scorecard. Additionally, the technologies put in place to monitor management and fault-detection software energy and systems performance for Steps 1 and 2 can also be used throughout with a modified RCx process. The company the implementation step to provide M&V. Finally, and perhaps most importantly, claims that it accelerates the RCx process by any auditing technology that provides ongoing commissioning enables the allowing the RCx engineer to better understand building’s engineers to sustain the savings gained from the ECMs implemented energy consumption and to even target specific in Step 3 and to identify additional possible operational savings. underperforming assets before conducting their investigation. oston) B Step 4: Retrofit Implementation • SkyFoundry—SkySpark: On its own, SkySpark ing,
is a technology tool for domain experts to d In spite of the relative simplicity of these first three steps, and the substantial capture their knowledge in “rules” that uil benefits that can be had by moving up through Step 3 and optimizing existing B automatically run against collected data. building systems, there is a misconception among building owners that Employing “semantic tagging”, pattern llen implementing energy efficiency measures is expensive, complex, and requires recognition, functional rules processing, and cA a complete overhaul of a building’s system. This misconception persists
other techniques, SkySpark’s analytics engine (Ma due to the slightly more complex, though not impossible, nature of Step 4— has the ability to automatically identify issues dA EEBE retrofits. In order to conduct “deep” retrofits required to obtain gigaton- e c worthy of attention. i scale reductions of CO2e, the use of finance is required. Yet sourcing the Off
capital to undertake these comprehensive retrofits remains one of the largest y challenges facing asset owners. The next section of this paper discusses
various methods of financingEEBE retrofits—methods that the CarbonW ar ture b c R oom believes to be capable of achieving gigaton-scale reductions in the CO2e hite
emissions of the Built Environment sector. c Y. ar Y. H P HOTOGRA P HORNER
OHN : J AGE M I
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To effectively optimize energy performance, building operators ought to perform commissioning exercises regularly
www.carbonwarroom.com 26 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Finance
The US ESCO market for EEBE project installations and services exceeded $5.1 billion in 2011 and is expected toreach $16 billion by 2020
• The traditional Energy Service Company (ESCO) model of financing is both common and useful for municipal, university, school and hospital (MUSH) projects, as it provides a holistic approach to implementing efficiency upgrades and allows for the implementation of performance guarantees. However, ESCOs typically favor large projects, leaving smaller projects with no financing or risk-mitigation strategy.
• New and innovative financing mechanisms, like Energy Service Agreements (ESAs), third-party on-bill finance, and assessment financing, allow asset owners of small and large buildings alike to access low interest rate financing for deep retrofits.
• Risk mitigation strategies are crucial to the success and scalability of any EEBE financial mechanism.
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T he previous sections of this guide were meant to provide a foundation for The primary advantage of performing a retrofit through the implementation of in-depth or comprehensive energy efficiency retrofits— a performance contract with an ESCO is that they have S tep 4 of the EEBE process, as outlined on page 23. It is commonly believed expertise and experience to design and implement high- that such comprehensive building improvements can offer asset owners up to quality projects, and to guarantee the savings from the 80 percent reductions in energy use. Applied across a wide range of building projects. In some cases the ESCO may also assist the asset portfolios, this represents gigaton-scale emissions reductions. However, owner with sourcing traditional financing or other incentives deep retrofits require substantial capital investment.I n times of economic by connecting them with banks or utilities with which the austerity, governments often do not have sufficient capital to fund these ESCOs have developed relationships. types of projects. T he predominant disadvantage of performance contracting The following section highlights third-party financing mechanisms that cover through major ESCOs is that, in many cases, “there must 100 percent of the upfront cost of the project, meaning that they neither be a large savings potential before an ESCO and financier depend upon government intervention nor do they require using an asset will make a commitment to an energy efficiency project, so owner’s capital. Along with explaining how each mechanism or model is performance contracts are generally arranged for facilities generally structured, the pros and cons of each are discussed with the aim with annual energy costs above $150,000.”30 Therefore, of improving the ability of asset owners to judge which mechanism might be smaller entities interested in retrofitting their buildings may most suited to their needs. not attract the large ESCOs as project partners.
Energy Services Company (ESCO) Despite this disadvantage, the market for ESCO-type projects remains significant.T he advantages offered byES COs, and Energy Services Companies (ESCOs) are typically large companies that their long tenure as market players in the energy efficiency specialize in demand-side energy services and that have been assisting their industry, allows them to capture much of the deal flow for customers with energy efficiency retrofits for decades. large projects. The ESCO market for EEBE project installations and services exceeded $5.1 billion in 2011 and is expected T he current ESCO model for EEBE is focused on providing performance guarantees to reach $16 billion by 2020.31 Some of the noteworthy that help backstop energy efficiency upgrades, making it easier for projects ESCOs that the Carbon War Room has worked with include to acquire financing.T ypically, an ESCO will enter into a performance contract Ameresco, Johnson Controls, Lockheed Martin, SAIC, Siemens, with the asset owner. In one variation of the performance contract model, the and Trane. The Carbon War Room fully supports the ESCO ESCO, generally through third-party finance partners, will invest all of the capital model as a sensible solution for many asset owners. However, necessary to perform the retrofit. Alternatively, the asset owner may finance the due to their preference for large projects, ESCOs tend to project via internal capital, a tax-exempt capital lease, or bond financing through dominate the MUSH (municipal, university, school, and a bank. In either case, the performance contract is in place to help give the capital hospital) market, which leaves plenty of room for other provider more comfort that the project will generate savings capable of offsetting market players to become involved in smaller commercial and the costs of the project. If the project ultimately underperforms, the ESCO makes residential projects. Many of these additional market solutions a payment on the shortfall, as Figure 6 illustrates. are described in the following sub-sections.
Figure 6: ESCO Flow of Payments
• De velop, install, Utility bill maintain, perform Customer Utility monitoring & Energy savings validation; Capital for project ESPC • Pr ovides savings gaurantee Returns / Loan payments
Energy Service Lender/ Company (ESCO) Investor
Source: Wilson Sonsini Goodrich & Rosati.
30 Ibid. 31 Pike Research. “The US Energy Service Company Market.” 2012. Pike Research. July 15, 2012.
www.carbonwarroom.com 28 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
ENERGY SERVICE AGREEMENTS Notes From the Field (ESAs) SCIenergy E nergy service agreements are energy financing “ We created the Managed Energy Services Agreement (MESA) to enable mechanisms that enable building owners to obtain the debt-constrained property—primarily commercial real estate, private benefits of retrofits without spending any upfront capital. hospitals, and private universities—to obtain non-debt capital that does This mechanism essentially works as a pay-for-performance not interfere with any lender covenants that they may have. MESA is the financing solution.U nder an ESA, the project developer sale of energy efficiency as a service: buildings pay us what they used to sponsors 100 percent of the upfront project costs, and then pay for energy adjusted for weather and occupancy, and SCIenergy pays owns the equipment and is responsible for any ongoing their bills. The risk of achieving savings rests entirely with us, as does the maintenance and gets repaid from the energy savings that burden of designing and installing, in collaboration with the landlord, accrue. There are several different models in the market a comprehensive set of improvements that will reduce energy usage. by which the vendor recoups the capital investment from the customer. At the end of the arranged term of the Simply put, we are installing comprehensive retrofits at no upfront cost agreement, the asset owner has the option to buy out the to the asset owners. In our experience, we have found three significant equipment from the vendor. Therefore, the major difference obstacles to executing a MESA project. First, because this is a pioneering between ESAs and the ESCO model is that the initial capital asset class, there is an element of novelty that asset owners take a while investment is provided by a third-party investor rather than to get comfortable with. Second, for commercial real estate, MESA independently sought out by the asset owner, as Figure 9 boosts asset yield by reducing below-the-line capital expenditure. illustrates. For private universities and hospitals, it represents a non-debt option that may be a very attractive, and in some cases the only option for an As a whole, ESAs provide an innovative method of third- EEBE project. However, we have found that in the majority of buildings, party financing that does not require sourcing a bank loan capital improvements take place only when equipment is broken beyond and can even be delivered off-balance sheet – depending repair, not when it is simply inefficient. Changing this reactive process on the specific structure of the deal.H owever, ESAs are is necessary, but property managers and owners are so accustomed to not without their critics. For example, since retrofit projects working in this manner that it has almost become a culturally embedded using ESA structures are very complex, have long sales norm and is therefore proving difficult to alter. cycles, and occur on a building-by-building basis, there are questions regarding whether ESAs are capable of achieving The third obstacle is more of a technical problem of data availability—
gigaton-scale reductions of CO2e emissions. there is often a significant lag between landlord interest in EM SA and the generation of the data to confirm project feasibility, largely as a The Carbon War Room has worked with vendors offering result of antiquated utility systems and misconstrued confidentiality ESAs, including SCIenergy, Metrus Energy, Abundant requirements. SCIenergy is moving towards establishing a more Power, Green Campus Partners, Cedargate Capital, and comprehensive and immediate presence in buildings, plugging directly Sustainable Development Capital and is bullish about the into systems to gather data and provide early value. All of these global opportunity for this structure to retrofit large numbers three issues can and are being addressed, and we are excited for the of buildings. prospects of the EEBE industry in the coming years.”
Steve Gossett, Jr., co-creator of Managed Energy Savings Agreement (MESA) and CEO, SCIenergy
ESAs provide an innovative method of third-party financing that does not require sourcing debt and can even be treated as off-balance sheet
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Figure 7: “ESA” Flow of Payments Utility disconnection
Historic energy use payment Utility payment Project Control Property Owner Account Utility Company ‘Lockbox’
Rent + expense Investment Returns above base stop Energy Efficiency Lender / Investor
Tenants Uniform Provides Commercial capital Code Filing
M&V Costs and Profit Service Money Flow Agreement Services/Agreements Operating Security/Remedy Company Energy services agreement and building upgrades (Equity) Source: World Economic Forum
SCIenergy Model
S CI Energy has been able to implement the largest For each project, SCIenergy forms a wholly-owned special purpose entity (SPE, number of ESA projects to date. As the company was in the form of a Transaction LLC) to provide energy services to the building formed by a merger between a technology provider owner. The SPE finds outside financing for the project and enters into an and a finance provider, it has a unique understanding agreement with the building owner (see Figure 7). Both the MESA contract and of building retrofits, a fact that allowed it to develop the loan agreement for the property improvements are held by the SPE. The and implement a particularly robust version of an ESA. SPE assumes responsibility for paying the property owner’s energy expenses for the duration of the contract period, which may be up to 10 years. During Their model, the Managed Energy Services Agreement that period, the building owner makes monthly payments to the SPE (via a (M ESA), works to boost asset yield by decreasing third-party collection company) of the contractually agreed amount, which the recurring capital expenditure of their client equals a measure of historical energy expenses, adjusted for energy prices, partners. SCIenergy pays the capital cost for energy weather, and changes in energy usage and occupancy. The SPE uses the funds efficiency upgrades, then directly charges the building to pay the utilities, service the debt and ensure a return for equity investors. owner their historic rate for electricity, assuming the responsibility for paying the property’s energy bill to the utility company themselves. The more successful the building retrofits are, the more profitable they become by increasing the difference between each building’s historic and current energy costs—a difference thatS CIenergy pockets as a recoupment of their investment. Under MESA, commercial property owners retain control of the EEBE equipment and savings after an initial eight- to 10-year contract.
www.carbonwarroom.com 30 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Figure 8: Metrus Value Proposition Sole equity contributer to project SPE, manager and owner of project
($) Residual project cash flows ($) Project equity, management services ($) Fixed interest and principle ($) Energy Customer Lender payments Special Purpose Entity (SPE) Savings Purchaser of realized Provider of non-recourse Bankruptcy-remove,self-performing, project- energy efficiency project fixed rate term and specific entity established as a limited liability output as a service on a construction loan SPE company (LLC) in the state of project operations ($) Project ($) Quarterly per-unit-saved basis dept via non- ESA Service recourse loan Charge NO SOURCE Installation of project, provision of O&M and M&V ($) Upfront payment for construction and periodic services, and project performance guarantee payments for ongoing O&M and M&V
ESCO/Contractor Provider of turnkey project installation, ongoing maintenance, and project Source: Metrus Co. performance gaurantee eoul)
Metrus Energy Model S
Metrus Energy’s model is similar to SCIenergy’s MESA model but is based on T he loan from an outside lender is made directly to the
the concept of monetizing the avoided energy use (“negawatts”), much like an project LLC, but the particular capital structure of the e Center, m
energy efficiency power purchase agreementEE ( PPA). Under its model, Metrus project depends on the underlying economics of the o H
pays for all project development and construction costs, and then, after a project project and the credit of the customer. Metrus’ ESA el is operational, the customer uses a portion of the cost savings associated with model has been proven via multi-million dollar energy d reduced energy consumption to make periodic service payments back to Metrus. efficiency retrofit projects for a major multinational
“ The price per unit of energy savings is a fixed, output-based charge that is set industrial corporation. sung Mo m
at or below a customer’s existing utility price, resulting in immediate reduced a S operating expenses.”32 On a quarterly basis, the measurement and verification ( AA
(M&V) data on the retrofit project is compiled and used as the basis for theESA A D
service charge. This means that the customer pays only for actual (i.e., realized, NA
not simply expected) energy savings, and is not exposed to any technology y performance risk, while avoiding all upfront capital costs or balance sheet impact. ture b c
As in all ES s, Metrus owns the installed assets for the duration of the ESA hite term and pays the external contractor for any ongoing maintenance, after c
which the customer has the option to purchase the equipment at market value. ar Y. H A dditionally, for each project utilizing the ESA structure, Metrus establishes P a special purpose entity (project LLC). Additional third-party debt is then secured from an outside lender to supplement the equity capital that Metrus HOTOGRA
invests directly, as Figure 8 highlights. P
HORNER
OHN : J AGE
32 M Metrus Energy, Inc. Summary Issue brief. Metrus Energy. 2012. I
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32 Metrus Energy, Inc. Summary Issue brief. Metrus Energy. 2012.
www.carbonwarroom.com 32 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Third-Party On-Bill
Several municipalities around the world are creating programs that tie EEBE loan T he most long-standing and common model of on-bill repayments to the building’s utility bill. Generally, on-bill payment schemes are mechanisms used to fund EEBE projects is simply the systems through which an entity (usually either the utility or a third-party lender) on-bill finance O( BF) model. Under the OBF model, pays for improvements in a home, a business, or a government facility and then the local utility lends capital to a ratepayer to purchase recovers the costs from participating customers as an itemized finance charge on a more efficient piece of equipment.T hen, once the the utility bill.33 Utility funds for such projects may come from government loans like project is finalized, the building owner allows the utility ARRA (American Recovery and Reinvestment Act), or from revolving loan funds. to collect repayment in future utility bills as part of the The projects may alternately be funded directly by a third-party investor. rate tariff.I n OBF programs, individual projects are funded by utility ratepayers through both a loan and “There is no consistent ‘one-size-fits-all’ approach to on-bill financing. Rather, it a rebate or other incentive. Funding is available for is an innovative collection mechanism that can be utilized in a variety of ways to businesses, and is repaid through a monthly line item optimize its net benefit across a diverse array of communities.”34 The defining on the customers’ utility bill with usually zero percent characteristics of this mechanism are that the EEBE projects are serviced by interest.35 utilities and repaid by customers via their monthly utility bills. In many cases, the savings achieved through the retrofit are sufficient to cover the additional line- T his method is popular because it is logical and item charge of the EEBE project. Additionally, by working with the utility, other streamlined for asset owners and contractors—however, incentives can be bundled into the efficiency retrofit to reduce the cost of the not all utilities embrace this structure. Although many project. On-bill mechanisms are often perceived as being lower-risk investments utilities have established on-bill financing schemes, and because customers already have strong relationships with their utilities, and are initial success has been observed, uptake of this basic very unlikely to neglect payment of their utility bill, especially if the threat of system has generally been low. Most utilities do not discontinuation of power is real. Also, the credit quality of energy efficiency loans relish the idea of investing their own capital in energy and other programs can be substantially improved by allowing for the investment efficiency projects, as they view that to be the traditional to be repaid through the utility bill. Finally, as mentioned above, there are several role of a bank or ESCO. In any case, the establishment of different options for financing on-bill mechanisms, which makes them applicable an on-bill financing mechanism often requires a directive for a wide range of buildings or situations. from the state’s public utilities commission.
Figure 9: On-Bill Repayment Diagram
Government/ Energy Efficiency Utility Regulator Lender/Investor
Goverment or rate Optional: Enabling payers subsidize loan Loan to utility Optional: utility Principle legislation and Utility Company interest repayment
Payment for building upgrade Repays loan on utility bill
Utility disconnect, UCC Filing Energy Contractor Property Owner Prequalified by • No upfront cost utility Retrofit Products and Services Energy Savings • Tariff stays with metre
Money Flow Services/Agreements Security/Remedy Source: World Economic Forum
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Notes From the Field Environmental Defense Fund A more recently developed alternative to the OBF model, “The Environmental Defense Fund believes that on-bill repayment termed on-bill repayment (OBR), allows for an asset (OBR) programs can transform the market for energy efficiency across owner to solicit private or third-party capital to cover the United States (and potentially the world) by providing a way for the initial investment in their energy efficiency upgrades, commercial and residential building owners to access the private though the investment is still repaid via the utility bill. The capital they need to upgrade their energy performance. In May 2012, utility simply collects and then passes the payments on the California Public Utility Commission (CPUC) ordered investor- to the capital providers, rather than serving as the actual owned utilities to establish OBR programs for commercial properties. investor themselves (See Figure 9). In a proposed OBR Those programs are expected to be operational by mid-2013. As we scheme expected to come online in California in 2013 have progressed from design to implementation stage with OBR, or 2014, the utilities would receive a collection payment we have found that some constituents have expressed concern with in exchange for serving as a facilitator of this process, the requirement that utilities treat the OBR charge as equivalent to thereby incentivizing them to participate in EEBE with a the utility charge. However, EDF believes that this equal treatment is new income stream. As in OBF, loan default might result critical to attracting private capital at scale. This is because lenders in meter disconnection, making it a contentious model use existing data on the historical performance of utility bill payments for cold weather climates.36 to evaluate credit risk, and very low historical default rates are the key value proposition for using an on-bill repayment mechanism. EDF has The OBR model is particularly effective for several consistently heard this message from both banks and rating agencies. reasons. To begin with, the capital is provided by third However, utilities and some consumer advocates have challenged parties, relieving the pressure on both asset owners this notion and expressed their preference for the utility and OBR and utilities to cover upfront costs, and no taxpayer or obligations to be distinct with respect to collection procedures. ratepayer funding is required. Additionally, the program’s administration and utility costs may be recovered Increasing dialogue among stakeholders has been crucial to our through fees charged to investors or developers. Another success in making progress. For example, we have convened important characteristic of an OBR program is that the stakeholder meetings, and made introductions among lenders and repayment obligation is a rate tariff that stays with the utilities to facilitate discussions that allow each side to understand meter. In the event of a change in ownership or tenancy, the other’s perspective. In addition, we have listened to utilities and the new payer of the utility bill would enjoy the savings realized that there are alternative payment structures we can utilize to from the project while also assuming the obligation. The achieve the program goal of aligning utilities’ and lenders’ interests. tariff also continues to apply in the event of foreclosure.37 It has also been critical to emphasize and clarify the strong consumer protections we advocate for being added to all OBR programs, The design of OBR programs may also further minimize including significant protections for vulnerable ratepayers, such as risk by requiring qualifying projects to provide an those with medical needs. estimate of bill neutrality, meaning that the monthly repayment amount will not be greater than the energy We have also looked to similar programs to better understand how savings from the upgrade. This ensures fairness for future they have addressed this critical issue. In New York, the Center for tenants, owners, and current mortgage holders. Given Working Families (CWF, a consumer advocacy organization) actively its use of investor capital, the OBR option has greater supports the state’s on-bill program, which has utilities follow standard potential for scale than the traditional OBF model—which collection procedures, including disconnection. CWF believes that the only relies on ratepayer utility capital—and is more likely utilities’ collection procedures, which have been vetted over many to be customizable to the needs of various property years, provide sufficient safeguards for vulnerable populations.W C F owners and vendors. Figure 11 highlights the main aspects also wrote a letter in support of EDF’s proposed OBR legislation. EDF of OBR. is optimistic that with the proper consumer protections in place, we will be able to meet the needs of consumer advocates, utilities, and lenders to create a well-designed and successful program.”
Brad Copithorne, Energy and Financial Policy Specialist , EDF
33 “On-Bill Financing Program (Tied-To-The-Meter) Study.” Energy and Finance. Harcourt Brown & Carey. February 15, 2012. http://harcourtbrown.com/2011/01/on- bill-financing-program-tied-to-the-meter-study/ 34 Bell, Catherine J., Steven Nadel, and Sara Hayes. “On-Bill Financing for Energy Efficiency Improvements: A Review of Current Program Challenges, Opportunities, and Best Practices.” Rep. no. E118. Washington, DC: American Council for an Energy Money Flow Efficient Economy. 2011. 35 Brown, Matthew, and Dave Carey. “Introduction.” Proc. of CPUC Energy Financing Services/Agreements Workshop, CPUC Auditorium, San Francisco. Security/Remedy 36 It should be noted that his method of mitigating risk is controversial given the dire implications of meter disconnection in cold weather climates. 37 Copithorne, Brad. “Creating Financing Markets for Energy Efficiency Projects in Commercial Buildings.” Issue brief. N.p.: Environmental Defense Fund, n.d.
www.carbonwarroom.com 34 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
United Kingdom Model
T he remainder of this section describes two versions A program similar to OBR is being delivered in the United Kingdom. Known as of third-party on-bill mechanisms, both OBF and the Pay As You Save (PAYS) scheme, it is a financing mechanism for residential OBR, that are being implemented around the world. buildings created under the umbrella of the Green Deal. With PAYS, the cost Although these programs are, in the Carbon War of a property retrofit is spread over a long period of time—and potentially Room’s estimation, particularly innovative, they by no across different owners and occupiers—as the obligation to repay is tied to means represent the only models for structuring on-bill the meter not the tenant. The savings from the retrofit will be more than the financing mechanisms for EEBE projects. costs of repaying that retrofit, with the requirement for Green Deal that the bill payer will be better off in the first year. If the building changes ownership and/ Oregon Model or occupancy, the benefits of theEEBE measures, along with the obligation to pay, are transferred to the new bill payer. One of the first municipalities to implement a version of a wide-scale on-bill repayment scheme was Portland, W ith the Green Deal program, some upfront costs, such as the cost of insulating Oregon, through their Clean Energy Works Portland solid walls, are subsidized through energy company obligation schemes, with (CEWP) program. Through this program, homeowners government incentives provided to encourage wider-scale adoption rates. receive assistance conducting an audit, selecting The retrofit work is undertaken by an accredited company with rigorous UK appropriate energy conservation measures, applying government mandated standards, and the mechanism as a whole is promoted for a loan, and implementing the building upgrade. The by trusted third parties, including local authorities. upfront financing for the projects is provided by a loan fund managed by the CDFI Enterprise Cascadia, and The program went live in October 2012 but the finance models are only now the homeowners repay the loan via their utility bill. The beginning to become available. Early demand figures are encouraging, with money in the fund is currently sourced from ARRA, the much of the drive coming from local authorities. Major cities such as Birmingham, Portland Development Commission, the Living Cities N ewcastle, Leeds and Manchester have initiated Green Deal programs, with Foundation, and other smaller funds.38 In this particular Birmingham in the lead. Finance for these projects will predominantly come program, interest rates vary based on applicant from a new venture called The Green Deal Finance Company (TGDFC), a private qualifications, and the loan cannot be transferred sector collaboration developed by PWC. Additional partners include the newly to a new property owner. During the preliminary formed UK Green Investment Bank and the UK government. Funding is also implementation of the program, loans expected to come from the European Investment Bank (EIB), whose averaged about $9,000 and monthly role is to provide interim finance and aggregateG reen Deal payments averaged about $46.39 projects until they can be refinanced through a investment As this program has grown out grade bond. of the pilot phase, changes and improvements have TGDFC’s interest rate will be set at 6.96 percent, been made, and the but with associated costs this will generally be Carbon War Room is in the range of 7.5–9 percent to consumers. excited to learn more On-Bill Repayment This rate is higher than most of the sector was about the results it is a potentially scalable hoping for, but it is generally recognized that will achieve in coming this is be best available without significant years. EEBE mechanism government subsidy. How consumers will react to this one of the key unknowns, but the being piloted in Carbon War Room sees great opportunities regions around for the program to scale. the world
40 If you are a municipality seeking a comprehensive understanding of how to establish a PACE program, the Carbon War Room highly recommends reading the “Property Assessed Clean Energy (PACE) Replication Guidance Package for Local Governments”, published by the State of California, and attached at the end of this 38 Bell, Catherine J., Steven Nadel, and Sara Hayes. “On-Bill Financing for document. Energy Efficiency Improvements: A Review of Current Program Challenges, 41 Eligible measures vary by program. Opportunities, and Best Practices.” Rep. no. E118. Washington, DC: American 42 Carmichael, Annie. “Property Assessed Clean Energy (PACE) Enabling Legislation.” Issue brief. San Francisco: Council for an Energy Efficient Economy. 2011. Renewable Funding & Vote Solar Initiative. 2010. 39 Green For All. “Clean Energy Works Portland: A National Model for Energy- 43 “PACE Program Basics.” What Is PACE? Web. 14 Mar. 2012.
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Assessment Finance
For more than 100 years in the US, municipalities have levied assessments on their Projects approved for the special assessment district are constituents to pay for upgrades to roads, sewers, schools, and other common paid for either by the municipality or by a third-party assets that benefit the public good. A special assessment district is a defined capital source like a fund or bank, meaning there is zero area within a community in which property owners stand to benefit from an upfront cost to building owners. The EEBE financing improvement project more significantly than the community in general.E ssentially, instead works by attaching a special tax assessment the establishment of special assessment districts allows for communities to pay in which the repayment obligation is actually attached for improvements proportionately, based upon the extent to which certain areas to the property itself and not the property owner, and will enjoy the benefits of the improvement, as those closer to the improvement, by transfers to the new owner with the sale of the property. virtue of benefiting more substantially from it, are charged more for the project. The participating property owners then pay off the debt via a property tax charge collected over the course of The idea of special assessment districts has many applications. In 2007, for up to 20 years, though shorter periods may be used.43 example, it was adapted by the city of Berkeley, CA to apply to renewable energy In most programs, estimated savings must exceed the projects that could result in cleaner air and the mitigation of climate change. The investment amount. Figure 10 illustrates how payment application of special assessment districts to EEBE upgrades represents another flows occur between a municipality, lender, contractor, innovative application of assessment financing, and its potential is most clearly and property owner. exemplified by programs like PropertyA ssessed Clean Energy (PACE).40 Given that property assessments usually qualify as PACE is a particular type of assessment financing that establishes an assessment eligible pass-through costs, PACE helps to overcome district to finance not onlyEEBE projects but also renewable energy, water the split incentives of tenants and owners that can occur conservation, or other sustainability efforts.41 The creation of PACE financing with triple-net-lease tenant-occupied buildings, such as districts is highly dependent on an individual municipality’s property tax laws, commercial and multi-tenant residential buildings. and, in most cases, requires specific AP CE-enabling legislation to be passed. The legislation must be built off existing financing and assessment authority Ultimately, tenants benefit from the utility bill savings of state and municipal statutes. Additionally, depending on the precise funding and also bear the costs of the PACE financing structure, mechanism planned for the PACE project (many of which are discussed on while owners are able to monetize the soft benefits page 37), steps may need to be taken to authorize the use of bonds to finance (associations with being green) and hard benefits improvements, to insure that assessments are secured by liens on properties, or (capitalization of energy savings) that accrue with to authorize financing improvements on private property.42 carrying out retrofits.44
Money Flow Figure 10: PACE Flow of Payments Services/Agreements Security/Remedy Property Tax + Federal or PACE Assessment Rent Local Goverment Property Owner Service Charge + PACE Property Tax Allocation PACE Modified: Senior Lien Assessment Loan Loss Pass-through Reserve Energy (P&I) (Three years P&I) Savings Tenant
Energy Efficiency Lender(s) Energy Contractor
Existing Mortgage Lender(s)
Principal and interest Refits Products and Services
Source: World Economic Forum. Cost of EE Improvements
www.carbonwarroom.com 36 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Figure 11: Status of PACE Enabling Legislation and Year Enacted
2009 2010 2010 2009 2009 2010 2009 2011 2010 2013
2009 2012 2009 2009 2013 2009 2008 2013 2010 2010 2009
2009 2009 2009 2013
2010
2013 2009 2013 legislative initiatives 2010 or planning to establish PACE legislation PACE legislation enacted No PACE legislation
Source: PACENOW.
A ccording to a baseline forecast scenario from a report by Pike Research, PACE will be used to finance retrofits for commercial properties at a rate of $2.5 billion annually by 2015. The report estimates this investment will create 50,000 new jobs and prevent 8 million metric tons of carbon dioxide emissions. As of May 2013, approximately $33 million in PACE renewable energy and efficiency deals have been completed in six states in residential and commercial PACE could used buildings with an additional current pipeline45 of $100 million. to finance retrofits for While some states have pursued this policy more aggressively than commercial properties others, enabling legislation for PACE financing for commercial buildings has been passed in 30 states plus the District of Columbia, as Figure 11 at a rate of $2.5 billion above illustrates. Representatives Hayworth (R-Calif.), Lungren (R-N.Y.), and Thompson (D-Calif.) have also proposed federal legislation, called the annually by 2015 - PACE Assessment Protection Act of 2011, in the House of Representatives (H.R. 2599). That bill would increase the scope of PACE financing to include according to Pike residential buildings by directing the Federal Housing Finance Agency (FHFA) to permit the PACE mechanism.46 Despite these promising steps, one Research of the main impediments to rapid deployment has been confusion about the details of PACE.
45 This pipeline is what has been reported by program administrators and has not been independently verified. 46 “Financing Energy Efficiency Upgrades with Property Tax-based Repayment.” Property Assessed Clean Energy Financing (PACE). Alliance to Save Energy. 2011. February 20, 2012. http://ase.org/resources/property-assessed- clean-energy-financing-pace 47 For this reason, there is little, if any, standardized nomenclature for these programs. The Carbon War Room has attempted to consolidate existing literature into the most recognized names for these structures, but it should be noted that the models might have different names in other literature.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Finance 37
Existing PACE Structures
T he following pages contain an examination of existing PACE structures and It should be noted that some PACE programs are will attempt to delineate between the various models. As PACE is a relatively designed with flexibility in several of the aforementioned new financing mechanism to the market, it currently takes many different structures. Unfortunately, describing every possible forms that depend on the legislative definitions of AP CE in particular regions, permutation of a PACE program is outside the scope of and on the entities that are administering the PACE programs.47 The Carbon this paper. It should also be noted that none of the four War Room has chosen to try to simplify the myriad variations by defining four structures described here have yet to show significant primary types of structures that support commercial PACE programs: uptake in the market.
1. Municipally Financed: In this model of PACE, a municipality uses a large Generally, the Carbon War Room believes that the first line of credit, backed by the full faith and credit of the municipality, to fund three structures (Municipally Financed, Pooled Bond, qualified projects on an as-needed basis.W hen sufficient project volume and Open Market) have some important challenges is reached, the portfolio can be sold through a municipal revenue bond to overcome. For example, both the Municipally issuance. The proceeds of the sale can replenish the line of credit and Financed and Pooled Bond models require large facilitate a new funding cycle. As an example, please see the description of numbers of projects to be aggregated for capital the Palm Desert Energy Independence Program in Palm Desert, CA, later in to be deployed, leading to long time horizons for this document. project implementation. Open Market structures reduce the project development cycle compared to 2. Pooled Bond: In this model, a property owner’s applications for PACE these other two. However, all three of these models financing are approved during an aggregation period, which means that only typically (though not in every case) require explicit once a sufficient number of approved applications have been assembled lender consent from mortgage holders. The Owner- will the local government sell a bond to fund all of the projects at once. The Preferred structure, on the other hand, suffers less from ClimateSmart Loan Program in Boulder, CO is one such example. these challenges. However, this model faces different challenges with respect to negotiations with mortgage 3. Open Market: In this model, property owners independently secure holders, which will be discussed further in the Lender financing for a defined project with the lender of their choice. Financing Consent section of this paper. terms are negotiated independently of the municipality and are predicated upon 1) senior lien position of PACE and 2) the underlying credit of the A potential advantage of the Owner-Preferred owner/building. This model avoids the timing delays associated with the structure is that, if program administrators filter the pooled bond approach but still requires the consent of mortgage holders. PACE applications through a third-party vendor, and by With owner-arranged projects, terms are most likely to be 5–20 years with pre-approving properties for financing, this model has an interest rate of 5–8 percent—though given the ad hoc nature of funding the ability to easily scale to entire municipalities rather methods for such projects, no published standardized rate exists. The Florida than relying on piecemeal applications retrofitting one Green Energy Works Program uses this approach. building at a time.48 The Carbon War Room recognizes that this perspective is not shared by all within the 4. Owner-Preferred: In this model, a vendor serving an active municipality PACE community and therefore it is discussed in more pre-approves each qualifying property for assessment financing, which is detail in the Lender Consent section. usually limited to a maximum of 10 percent of the property’s fair market value. The vendor either fully funds the program or pools projects before Table 2, overleaf, demonstrates the current (May 2013) committing capital. All potential projects must meet strict underwriting status of commercial PACE-funded projects and those guidelines. Some programs following the owner-preferred structure require in development. the program administrator or the property owner to receive full consent from the primary lender, while others only require lender notification. Even in cases where only lender notification is required, if a mortgage holder can demonstrate that the assessment lien would violate the terms of an existing loan agreement, it may object to the assessment. In the event of a lender objection, property owners must meet additional requirements before proceeding (i.e., reversion to Open Market model). If the lender does not object, the vendor provides fixed-rate funding secured by individual PACE assessments. Amortized for terms up to 20 years, interest rates are fixed for the life of the assessment and are tied to a benchmark rate, such as US Treasuries, currently falling in the 5–6 percent range. The Clean Energy Sacramento Program in Sacramento, CA is an example of this model. 48 For the purposes of full disclosure, the Owner-Preferred model was pioneered by the Carbon War Room-backed PACE Commercial Consortium, consisting of Ygrene Energy Fund, Hannover Re, Energi, and Lockheed Martin, with an initial $650 million commitment from Barclays for the Miami and Sacramento markets. Projects began to be funded in Sacramento in January 2013.
www.carbonwarroom.com 38 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Notes From the Field Program Examples: Ygrene Energy SF Commercial PACE Fund and Melbourne “We originally launched our San Francisco’s PACE program The Carbon War Room has worked to create the PACE (GreenFinanceSF) as a residential program in April 2010, but Commercial Consortium (PCC)—consisting of Ygrene suspended it in July 2010 due to objections raised by mortgage Energy Fund, Hannover Re, Energi, and Lockheed regulators the Federal Housing Finance Agency (FHFA). Since Martin—to address the Miami and Sacramento markets. commercial properties are not subject to those regulators, we pivoted Announced in 2011, the first projects broke ground in our focus to a commercial-only program that uses an Open Market January 2013 in Sacramento. PACE financing approach—enabling multiple capital providers to serve the diverse commercial real estate market through a private The following section describes the Ygrene Energy placement bond model. The program closed its first financing Fund model, which is an example of a PACE initiative. transaction in October 2012 for Prologis Inc., which will install $1.4 This model removes the pressure on property owners million in lighting and HVAC improvements, and a 200 kW rooftop to acquire financing, offers an accelerated timeline solar photovoltaic system. for funding projects, and relies on strict underwriting criteria that include: In 2010, when the FHFA statements shut down a promising start to the San Francisco residential program (~$900,000 in applications in the •A n energy audit from a recognized firm that assesses first two months), it had a chilling effect in which almost all developing the viability of various energy efficiency solutions and residential PACE programs around the country were immediately forecasts/models the expected savings over the life suspended. Some questioned whether commercial programs would be of the assessment term able to move forward. Also, since program start-up costs were being covered by federal grant funds (American Recovery and Reinvestment • Use of a performance-guaranteeing insurance A ct, or ARRA), timing challenges emerged with respect to strict product from insurance companies like Energi spending deadlines; in California $30 million in ARRA funds originally designated for residential PACE also needed to be reallocated after the • A Savings-to-Investment Ratio (SIR) in excess of one FHFA notices, and it was not totally clear how to commit those funds. ensuring that all projects pay for themselves
Considering the challenges described above, our team needed to • The borrower under a PACE lien may not have filed act quickly to establish new commercial administrative and technical for bankruptcy in the previous seven years guidelines, update our bond authorization, and obtain legislative approvals, among other things. Additionally, the program had to • The term of the assessment should not exceed the identify an appropriate capital structure to finance commercial retrofit useful life of the improvements projects, which would presumably be larger in size but smaller in number. We explored our options and ultimately chose the Open • The property owner must be current on property Market model, as this approach would not require a new solicitation taxes and have not been late on a payment more than for a single finance provider, which would have been time prohibitive. once in the past three years, or since purchase if the Since Open Market PACE allows for flexible deployment of capital from purchase date of the property is less than three years. multiple sources, we felt it was a good fit given the wide variations in the commercial real estate market and the newness of the program.
In retrospect, it is clear that marketing and outreach—which are critical to promote the program opportunity and energy efficiency in general to owners—were under-funded at the time of the program launch; new funding sources will help to increase outreach to owners, and especially contractors, who are ultimately the ones who can “sell” energy upgrades. Additionally, our first bond closing has confirmed that transaction costs can be significant. While it is generally understood that with experience and time these costs will go down, currently they may be perceived to be burdensome. To address this in the interim, we have recently identified new resources to reduce those costs for early adopters. All said and done, we are excited to see PACE gain momentum in San Francisco and throughout the country.”
Rich Chien, PACE Program Manager, City and Council of San Francisco
www.carbonwarroom.com Carbon War Room Research Report – 2013 Finance 39
I t is also important to note that programs similar to PACE have been implemented in other countries as well. One example is the Environmental Upgrade Agreement program in Melbourne, Australia.
The city of Melbourne’s “Zero Net Emissions by 2020” strategy focuses on the retrofit of existing commercial and residential buildings, which account for the greatest emissions in the city. In response to this emissions profile, the City of Melbourne delivers two flagship programs: 1200 Buildings and City Switch (focused on building owners and office tenancies respectively).T he City of Melbourne adopted Environmental Upgrade Agreements (EUA) in 2011.
In 2012/13 the Australian Government stimulated $25 million investment from the private sector in EUAs and up to $50 million in other innovative finance mechanisms. The establishment of the new Clean Energy Finance Corporation, responsible for $10 billion, will see further investment in energy efficiency and renewable energy mechanisms and projects. Interest in EUAs has grown significantly since Melbourne introduced the mechanism to Australia. Legislation has been changed in the state of New South Wales to enable EUAs and the mechanism will soon be available in the state of South Australia. oston) B ing, d uil B llen cA
(Ma PACE provides dA e c i financing for the Off y upfront costs of
ture b retrofits while c hite
c overcoming the split Y. ar Y.
H incentives that exist P between tenants
HOTOGRA and owners P HORNER
OHN : J AGE M I
www.carbonwarroom.com 40 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
www.carbonwarroom.com Carbon War Room Research Report – 2013 Finance 41
Table 2: US Commercial PACE Market – Projects Funded and in the Pipeline
Location Name Scope Program Adminstrator Funded Pipeline
Los Angeles CA Energy Upgrade LA PACE LA County Sustento Group - $18,000,000
Palm Desert CA Energy Independence Palm Desert City $575,000 - Program
Placer County CA m Power Placer Placer County County $742,000 $2,411,000
Sacramento CA Clean Energy Sacramento City of Sacramento Y grene Energy Fund $1,000,000 $30,000,000
San Francisco CA GreenFinanceSF San Francisco City $1,400,000 $4,000,000
Sonoma County CA SCEIP Sonoma County County $11,000,000 $1,300,000
Statewide CA CaliforniaFIRST 14 Counties thus far R enewable Funding $0 $28,500,000
Statewide CA California PACE - FigTree 18 Counties Fig Tree $735,745 $2,278,000
Counties CA HERO Program - Commercial 2 Counties Samas Capital $0 -
Possible statewide CA HERO Program Residential P ossible statewide R enovate America $0
Yucaipa CA Energy Independence City of Yucaipa City $20,252 $20,284 Program
Boulder County CO Climate Smart County Program closed $1,520,000 -
Statewide CT C - PACE Statewide CEFIA $185,000 -
eoul) Washington DC Green Energy DC District Wide Various Advisors - $340,000 S
Statewide FL Florida Green Energy Works any Municipality E co City Partners - $700,000
e Center, Statewide FL Green Corridor District any Municipality Y grene Energy Fund - - m o H Statewide FL Florida PACE Funding Agency any Municipality SAIC - - el d Atlanta GA Clean Energy Atlanta City of Ann Arbor Y grene Energy Fund - -
sung Mo Ann Arbor MI Ann Arbor PACE any Municipality Clean Energy Coalition $565,000 - m a S
( Statewide MI Lean & Green E dina Lean & Green $9,500 - AA A
D Edina MN Edina Emerald Energy any Municipality Eutectics Consulting - - NA
Program y Other MN Eutectics Consulting - - ture b c Statewide MO Missouri Clean Energy District MoCEF - - hite c Statewide NY Energize NY Westchester County LDC - -
Y. ar Y. (plus) H P Cleveland Vicinity OH County District Lake County Port $3,375,000 - Authority HOTOGRA
P Toledo OH Toledo-Lucas Municipal PACE County District Port Authority $12,000,000 -
Milwaukee WI Milwaukee City HORNER
Total $32,552,497 $87,549,284 OHN : J AGE M I Source: PACENOW and Carbon War Room research.
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Lender Consent Challenge Residential Assessment Finance
The single most polarizing aspect of PACE is the argument over whether or not PACE financing has been developed for residential the implementation of PACE projects should require the consent of mortgage properties as well as commercial properties, and there lenders. Although most PACE programs share the ideology that PACE are currently active residential PACE programs in assessments should receive the same treatment as other special assessments, several municpalities. While many cities had earnestly there are two fundamentally divergent opinions in the marketplace as to how begun developing programs from 2008 to 2010, most to address the issue of lender consent. of these programs were shut down in light of the May 2010 letters from the Federal Housing Finance On the one hand, PACE itself is still a new mechanism and there is a lack of Agency (FHFA) stating that under the terms of Fannie empirical data on the persistence of PACE-generated savings over the long Mae/Freddie Mac, residential property owners are not repayment term (up to 20 years), leaving banks understandably hesitant to allowed to obtain loans that have senior lien status forfeit their first lien position. Therefore, many PACE programs are predicated to a mortgage. Furthermore, such loans would be on the belief that there is a real risk of litigation to the property owner and the an “unallowable encumbrance” to a property with a municipality if PACE assessments are done without consent from the mortgage Fannie/Freddie-backed mortgage. lender. This is exacerbated by the fact that PACE assessments are voluntary rather than mandatory. Proponents of this opinion believe that the existing In light of the FHFA’s objections, federal legislation has PACE structures function more similarly to a loan, and since most mortgages been proposed. The PACE Assessment Protection Act have covenants restricting additional debt, lender consent should be required. of 2011, HR 2599, was introduced into the US House of Certainly, requiring that mortgage lenders approve PACE financing reduces Representatives on July 20, 2011 by Congresswoman the risk that asset owners will be accused of violating mortgage covenants. Nan Hayworth (R-NY) and is co-sponsored by a bi-partisan contingent of 51. This bill, if passed, will On the other hand, other programs are based on the confidence in the legal prevent federal residential and commercial mortgage authority of assessment finance and, thus, only require the property owner to regulators from adopting policies that conflict with or supply the information about the retrofit financing to the mortgage lender. thwart established state and local PACE laws.51 Proponents of this opinion claim that lender consent should not be required, pointing to more than 100 years of statutory authority supported by court Also in response to the FHFA’s guidance to Fannie and precedent that validates a municipality’s intrinsic right to assess levies in the Freddie, several states, municipalities, and NGOs filed “public purpose”, with wide deference for cities to define public purpose as lawsuits against the FHFA. In 2012, the District Court they see fit.49 Any such levies are repaid via property taxes and therefore are for the Northern District of California forced the FHFA senior to any other debt placed on the property. The logic of this argument to go through a rule-making procedure; the FHFA is that, since banks have not successfully raised encumbrance issues when appealed and in March 2013, the 9th Circuit Court of municipalities assess levies for schools, sewers, or streetlights, there is no Appeals vacated the order, dismissing the case. As of precedent for them to raise concerns with levies that pay for renewable energy the publication date of this paper, it is not clear whether or efficiency projects. the plaintiffs will petition for a larger panel on the 9th Circuit to hear the case “en banc” or whether they will Many property owners are also worried about lenders’ ability to foreclose petition the Supreme Court to review the case. based on “contract interference” or “impairment” of the mortgage under a PACE system, which may occur when the assessment supplants the property’s mortgage in the first lien position. However, there has yet to be a case in which a bank has been able to legitimately claim that an egregious act has been done, or that they were substantially damaged by the implementation of a PACE tax, especially given the particular constructs of this type of assessment. In fact, under the three-part test used by courts, the Carbon War Room has concluded that the creation of PACE assessments as senior liens do not constitute an 49 Ibid. 50 unconstitutional impairment. Actually, by lowering energy costs, PACE studies 50 Energy Reserves Group v. Kansas Power & Light. No. 81-1370. Supreme Court. clearly show that the program—unlike other charges—enhances the property January 24, 1983. 51 Ibid. owner’s ability to pay their mortgage. 52 “Welcome to the City of Toronto Website.” About Tower Renewal. N.p., n.d. December 15, 2012. Given the infancy of PACE programs, it is difficult to demonstrably prove 53 http://www.vancouversun.com/technology/Vancouver+energy+efficiency+pro gram+bombs/7907720/story.html the soundness and safety of PACE liens with regards to foreclosures and 54 http://www2.news.gov.bc.ca/news_releases_2009- defaulting. Yet the existing data is promising. For example, a recent “Energy 2013/2013EMNG0072-000827.htm Upgrade California” white paper on PACE concluded that in 2009–2010, the 55 MacLean, John. “Structuring Loan Loss Reserve Funds for Clean Energy Finance Programs.” Energy Efficiency Finance Corps. January 15, 2010. total secured tax delinquencies for the county of Somona were 3.3 percent February 10, 2012. compared to PACE assessment non-repayments of 1.19 percent. For 2010–2011, 56 Energi, Inc. “Risk Mitigation through Insurance for New Energy Financing.” Rep. N.p.: n.p. 2012. total secured tax delinquencies in Sonoma were 2.3 percent compared to PACE 57 Ibid. delinquencies of 1.8 percent. 58 Ibid
www.carbonwarroom.com Carbon War Room Research Report – 2013 Finance 43
Program Examples: Vancouver Risk Mitigation It should be noted that, while residential PACE E ven with innovative financing mechanisms likeESA s, on-bill financing, and is essentially on hold in the United States, it is PACE, loans for energy efficiency projects are not always attractive to lenders. being pursued in Canada via the Home Energy T here are a number of options that have the potential to make these loans more Loan Program (HELP) in Vancouver and the Tower attractive, including additional credit enhancements that utilities and lenders R enewal Program in Toronto,52 and is also being may require to help mitigate the risk of default. considered in New Zealand. One very common method of reducing risk is to establish a loan loss reserve Vancouver City Savings Credit Union (“Vancity”) fund. A loan loss reserve fund leverages public money to cover a percentage made C$5 million available for up to 500 loans for of the total loan portfolio principle—usually 2–10 percent. Providing this residential energy efficiency retrofit measures in guaranteed protection against losses makes loans for energy efficiency Vancouver’s Home Energy Loan Program (HELP). projects more attractive, and may allow lenders to apply lower interest rates Homeowners could borrow up to $10,000 for 10 with more flexible terms.I t also enables public funds to have a significantly years at 4.5 percent, with payments comparable larger impact than they would if they were used to finance projects directly.55 to the retrofit’s energy savings. The City of Vancouver and other outside parties provided a Many of these innovative financial mechanisms are also considered risky loan-loss reserve fund to reduce risk for Vancity. because they rely so heavily on the energy savings as a means of repaying loans. The function of this one-year pilot project was In order to ameliorate this component of the risk, the property owner and/or to demonstrate the need for, and efficacy of, lender will often require the contractor to offer a collateralized guarantee on retrofit loans. medium-to-large-scale projects. Doing this mitigates the risk associated with measured energy savings by assuring fair compensation to the investor in the The HELP program wrapped up after one year event that the retrofit does not generate the expected level of savings. without meeting its 500-loan target. The low uptake of the program has been tentatively attributed to Another option is to add third-party performance and savings guarantees current low energy costs and an interest rate that to projects to offer assurance to lenders that customers will be able to repay is perceived as too high.53 Although Vancouver’s loans through energy savings.56 One recent development in this option is the program did not achieve all of its goals, it did help re-emergence of Energy Savings Insurance.57 Energy Savings Insurance, such homeowners reduce emissions and save money as that being offered byE nergi, backstops contractor guarantees of system while also inspiring new energy efficiency financing effectiveness and energy savings and increases the “bankability” of projects. programs across the province. The province, If the guaranteed savings are not met and the source of the deficiency is an along with BC’s utility companies, started a pilot effect of contractor design or installation, then the system owner is reimbursed on-utility bill financing program in Colwood and the an amount equal to the output shortfall. Okanagan region in 2012. This program is scheduled to expand in January, 2014, with the potential of The application of adequate risk protections through insurance will further going province-wide.54 encourage the continued success and growth of the clean energy and energy efficiency markets. More specifically,E nergy Savings Insurance is particularly beneficial because it: reduces barriers to entry for smallerES COs that do not always have sufficiently strong balance sheets to self-insure the savings; forces the criteria for defining energy savings to be transparent and explicit; mitigates the risk of system underperformance; and adds security of return on investment for financiers.A dditionally, in many cases “the insurer provides L oan loss reserve third-party review of engineering and design and third-party involvement in ongoing measurement and verification, thereby increasing the funds and loan building owner’s confidence level to invest.”58 Overall, the integration of insurance products into building retrofit financing leads to higher guarantees are two project confidence among building owners and lenders that wish to ways that municipalities increase the energy efficiency of their portfolio. The combination of new finance mechanisms that enable asset can enhance the owners to source new avenues of capital in tandem with risk credit of projects and mitigation measures has the transformative capacity to unlock hundreds of billions of dollars for energy efficiency retrofits globally. encourage private This paper’s attention now turns to the role of government in creating sector participation policies that can harness and unlock the best practices of entrepreneurs.
www.carbonwarroom.com 44 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Policy
Government can play an important role in creating a policy environment conducive for market forces to accelerate investments into energy efficiency retrofits
• Policies like utility decoupling, point-of-sale auditing, and benchmarking mandates create a framework for asset owners to understand how their buildings consume energy – a necessary condition for retrofits to occur
• Other policies exist to facilitate innovative financing structures, such as assessment finance and on-bill finance, which allow asset owners to retrofit buildings.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Policy 45
What role does policy play?
In its work, the Carbon War Room is continually asked by stakeholders ranging How to Incentivize Upgrades from municipal representatives to large asset owners, “Where do we begin?” Without Creating Perverse Incentives: Utility Decoupling While the Carbon War Room focuses on solutions that do not require changes in policy, it recognizes that there are certain policy frameworks that are more Investor-owned utilities traditionally operate within a effective at fostering entrepreneurial solutions than others. Therefore, the structure that disincentivizes energy efficiency: they Carbon War Room supports the premise that government can help create make money by selling electrons to consumers. The environments conducive to competition, as well as that enable innovative private more electrons they sell, the more money they make. sector financing mechanisms to flourish. In fact, many of the financing solutions Under this system it would be illogical for utilities to discussed previously are highly dependent upon local policies, like the creation promote or engage in energy-saving efforts. Therefore of enabling legislation, the establishment of special districts, and the requirement an effective first step for a state interested in promoting for utilities to serve as a billing mechanism for EEBE repayments. efficiency is to pass decoupling legislation that alters this rate structure for utilities. As Figure 12 illustrates, As mentioned earlier, there are several ways to incentivize efficiency upgrades, most US states have either implemented or passed the most common being rebates, credits, and accelerated depreciation utility-decoupling laws. schedules. While well intentioned, these incentives have the capacity to create a myriad of problems, not least that such rebates and credits are typically only offered in small amounts and only for limited periods of time. Many of the incentives are also disjointed, with some offered by state and federal governments, some by utilities, and others by private institutions, and it is up to asset managers and homeowners to navigate this disjointed maze of incentives. Ultimately, applying for credits is a time-consuming process, and many building owners and managers simply cannot make it a priority.
Figure 12: Status of Decoupling in the US Decoupling in place Decoupling pilot program Decoupling possible, no current programs Other alternative in place No related programs
Source: The Energy Information Administration (EIA)
www.carbonwarroom.com 46 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
T he most common method of decoupling requires utilities to collect a certain level of revenue, regardless of sales. Typically this entails the utility charging a fixed rate per customer instead of per unit of energy sold. These fixed rates can be altered periodically to reflect changes in the infrastructure or customer base. “Performance targets or efficiency incentives are typically also included in a decoupled compensation scheme, thereby incentivizing the reduction of energy demand by encouraging the utility to improve the efficiency of its infrastructure and employ demand-side management practices.”59
T he results of decoupling schemes have been extraordinarily successful, with California often held up as a shining example. The state applied decoupling to natural gas in 1978 and to electricity in 1982. Since the first oil shock in 1973, “per capita electricity use in the nation has increased by about 50 percent to about 12,000 kilowatt-hours annually. Meanwhile, over that same period, per capita electricity use in California has remained absolutely flat at about 7,000 kilowatt-hours per year,” 60 as Figure 13 illustrates. While it is difficult to attribute all of California’s energy efficiency gains to decoupling alone, it is one of the main programs that have made such gains possible.
Figure 13: California vs. US Annual Per Capital Electricity Use 14000
12000 US Average
10000
8000 California kWh
6000
4000
2000 1973 2009 Source: The Economist. Year
It is important to note that, “although decoupling can neutralize the disincentive to support energy efficiency programs, it doesn’t create a financial incentive to save energy through investing in energy efficiency that is comparable to the financial incentives that exist for utilities to invest in capital assets such as new power plants and facilities.”61 Stronger policies, therefore, would pair decoupling with additional incentives for reducing energy use and emissions.
59 “Decoupling In Detail.” Center for Climate and Energy Solutions. C2ES. February 15, 2012. http://www.c2es.org/ what_s_being_done/in_the_states/decoupling_detail 60 Brownstein, Ronald. “The California Experiment.” The Atlantic. N.p., October 2009. July 15, 2012. http://www. theatlantic.com/magazine/archive/2009/10/the-california-experiment/7666/2/ 61 “ACEEE | Decoupling Utility Profits from Sales.” American Council for an Energy-Efficient Economy. ACEEE. February 15, 2012. http://aceee.org/topics/decoupling
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Notes From the Field Washington, DC’s Benchmarking Program “Given the fact that buildings account for three-quarters of the greenhouse gasses emitted in the District of Columbia, any effort to reduce energy use and carbon emissions there must begin with existing buildings. Energy benchmarking is the natural starting point for these efforts because, as the saying goes, you can’t manage what you don’t measure. The Clean and Affordable Energy Act of 2008 mandates that all private buildings over 50,000 square feet and all district government buildings over 10,000 gross square feet, annually benchmark and publicly disclose their energy and water consumption using ENERGY STAR® Portfolio Manager. The first deadline for data submission isA pril 1, 2013 for all private buildings over 100,000 square ft, moving to private buildings over 50,000 sq ft by April, 2014.
During the public outreach preceding the passage of the law, building owners and managers (via the local BOMA affiliate) argued that mandatory benchmarking was unnecessary due to the already high market penetration of ENERGY STAR® Portfolio Manager in DC. Furthermore, the real estate community was particularly opposed to the public disclosure requirement. In spite of these objections, DC Council passed the law. During the lengthy regulatory process, owners and managers of multi-family buildings voiced concern about the inclusion of residential properties. Commercial property owners and managers questioned the requirement to benchmark the whole building (including ground floor retail and restaurant spaces that were exempt under US EPA guidelines). In addition, many stakeholders were concerned about the possibility of confidential information being disclosed.
In order to reduce concerns about public disclosure, DC Council stipulated that the public disclosure requirements would begin in the second year of benchmark reporting. In addition, the program was phased in so that only oston) B the largest, most capable asset managers would have to comply initially.
ing, DDOE also made allowances in terms of what data had to be reported, d especially in the initial years, and required non-residential tenants to comply uil B with data requests from building owners. Together, these changes removed the main barriers to successful benchmarking, particularly of residential llen
cA properties. DDOE also made clear that no financial data would be collected and limited the scope of the summary data that would be disclosed. (Ma dA e
c T he most important lesson for other jurisdictions contemplating an energy i benchmarking and disclosure program is that easy access to reliable Off
y building-level utility data is critical. If not already available, jurisdictions should work to get the local utility companies to provide aggregated
ture b whole-building data, and, ideally, to upload this data directly into the c owner’s ENERGY STAR® Portfolio Manager account. Where possible, the hite
c law should require utility companies to offer this service. In addition, since building owners will always have to get some data from tenants, the law Y. ar Y.
H should also require tenants to provide certain information to their landlord P upon request, and back up this requirement with realistic fines for both owners and tenants. Finally, a widespread public outreach campaign is
HOTOGRA essential to achieving a high compliance rate.” P Marshall Duer-Balkind and Dave Good, District Department of the
HORNER Environment, Government of the District of Columbia
OHN : J AGE M I
www.carbonwarroom.com 48 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
Benchmarking and Disclosure Rules
A t a more granular level than utility decoupling, asset owners need to understand The NABERS program has ensured that building how their buildings are performing. Any party interested in improving energy owners take initial steps toward improving their energy efficiency in an existing building should begin by implementing a benchmarking efficiency by determining the initial conditions of their effort in order to establish a baseline against which to compare any upgrades. buildings. “Government agencies and councils, planning Simply increasing awareness of current energy use among building occupants and housing authorities, and utilities may also be often results in incremental energy savings. Policies that mandate the collection interested in the information that NABERS generates and disclosure of benchmarking data are therefore another useful tool for municipal as a means of encouraging environmental improvement leaders looking to increase their cities’ efficiency. A number of US municipalities and providing incentives.”66 New Zealand is adopting the are implementing or considering deploying benchmarking programs in the coming NABERS program as well, with plans for implementing years—see Figures 14 and 15. a voluntary NABERS program in late 2013.
New York City is a pioneer of energy benchmarking mandates. The passage of Point-of-Sale Auditing Local Law 84 in 2009 called for the benchmarking of city buildings using the EPA’s Portfolio Manager tool to begin in May 2010, with commercial, mixed-use, Another way to encourage energy efficiency and residential buildings coming under the same mandate in May of 2011.62 The improvements in the existing building stock is to city recently released its reports from the program analyzing the first year of data implement a requirement whereby the sale of a for both municipal and privately owned buildings. The reports show that New building space triggers improvements. “Point-of-sale York City municipal buildings scored at or around the national averages for similar efficiency upgrade policies ‘[require] compliance buildings, while energy use varied widely in privately owned buildings, even among with certain energy (and sometimes water) efficiency buildings of the same type. Overall, buildings’ energy use was on par with New requirements before buildings can be sold, transferred England averages, and was lower than national averages. The city estimates that if from one proprietor to another, or renovated beyond a its relatively inefficient large buildings could be improved to meet the median level predetermined total permit value.’”67 of energy use in their category, New York City could reduce energy consumption by 18 percent and greenhouse gas emissions by 20 percent.63 This solution is not always well received by asset owners because it increases the cost and complexity S an Francisco has also been working on landmark legislation (AB1103), which of building transactions. However, there are measures came into effect in 2013.I n the first phase of this plan, utilities must provide energy that can be put in place to minimize the strain on consumption data upon request. In the second phase, non-residential buildings will building owners. For instance, a cap can be placed on be required to disclose benchmarking data for sale, lease or refinancing (discussed the cost of improvements. Under these circumstances, further below). Additionally, any building eligible for an ENERGY STAR® rating must “requirements may be satisfied once homeowners or disclose this rating, and buildings ineligible for the score must disclose the energy property owners have completed upgrades that are use intensity level (kBtu/sf-yr) of the building. Figure 17 highlights some of the US valued up to a specified dollar amount, or that are cities set to roll out benchmarking programs in the coming years. equivalent to a certain percentage of the building’s value.”68 Creating this type of mechanism will, at the This new piece of legislation builds offS an Francisco’s Building Performance very least, result in a greater understanding of building Ordinance that was implemented in February 2010. In order to comply with energy use and potential areas in need of improvement. this earlier rule, asset owners must perform annual benchmarking and disclose
ENERGY STAR® ratings, energy use intensity, annual CO2e emissions, and other While mandating efficiency upgrades can be effective, basic descriptive data. They must also have energy audits performed by a qualified the Carbon War Room realizes that it is not always professional at least once every five years.64 politically optimal, or even possible. There are other ways that the government can facilitate private investment A ustralia has taken the benchmarking and disclosure concept to the level of national into energy efficiency without explicit requirements. policy. The government of New South Whales manages the National Australian Built Environment Rating System (NABERS), which is an intensive version of the benchmarking programs described above.
“NABERS is a performance-based rating system for existing buildings that rates a building on the basis of its measured operational impacts on the environment, and provides a simple indication of how well asset owners 62 February 1, 2012. http://www.nyc.gov 63 PlaNYC. “New York City Local Law 84 Benchmarking Report.” Issue brief. City of New are managing these environmental impacts compared with peers and York. August 15, 2012. http://www.nyc.gov/html/gbee/html/plan/ll84_scores.shtml neighbors. NABERS can be used to define and set operational performance 64 Jewell, Mark, and Barry Hooper. “Benchmarking and San Francisco’s Energy targets and measure and rate actual performance. Accredited ratings can Ordinance.” Webinar. January 13, 2012. 65 February 1, 2012. http://www.nabers.com.au/ also be used to disclose and report on performance to interested parties, 66 Ibid. establish commercial relationships for the monitoring and maintenance of 67 “HousingPolicy.org | Policy—Set Standards and Offer Incentives.” Toolbox. Housing Policy & Housing Strategies from HousingPolicy.org. February 20, 2012. http://www. performance targets, enlist professional services to improve a rating, and housingpolicy.org/toolbox/strategy/policies/standards_incentives.html?tierid=113332 make decisions about priority actions or investment options.”65 68 Ibid.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Policy 49
Figure 14: Benchmarking and Disclosure Policy Status
Jurisdiction Benchmarking Reporting Disclosure Audits RCx (Building Type and Size
Non-residential Multi-family To local On public To To transactional counterparties government website tenants Sale Lease Financing
Austin 10k SF+ 5+ units ✓ - - ✓ -- ✓ -
California 10k SF+ - ✓ - - ✓ ✓ ✓ --
Washington, DC 50k SF+ 50k SF+ ✓ ✓ ------
New York City 50k SF+ 50k SF+ ✓ ✓ ---- ✓ ✓
San Francisco 10k SF+ - ✓ ✓ ✓ - - - ✓ -
Philadelphia 50k SF+ - ✓ ✓ - ✓ ✓ - --
Seattle 10k SF+ 5k SF+ ✓ - ✓ ✓ ✓ ✓ --
Washington State 10k SF+ - - - - ✓ ✓ ✓ --
Under Consideration Boston, Boulder, Cambridge, Chicago, Minneapolis, Portland, San Jose
Source: Institute for Market Transformation
Figure 15: Benchmarking in the US
Seattle Washington Maine Portland Minnesota Vermont New York Oregon Michigan Massachusetts Minneapolis South Dakota Boston Connecticut Chicago San Francisco New York City Denver Ohio Philidelphia illinois
San Jose Colorado Washington, DC California Kansas Arlington Santa Fe Tennessee
New Mexico
Austin
Alaska
Hawaii
Existing Commercial Rating & Disclosure Public Buildings Only
Source: Institute for Market Transformation. Commercial Policy Under Consideration Existing Residential Disclosure
www.carbonwarroom.com 50 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Demand Aggregation
• Achieving widespread adoption of energy efficiency requires aggressive marketing and outreach programs that will help to aggregate demand, while demand aggregation can also be achieved through convenings that encourage open communication and collaboration.
• Countries or municipalities may also engage stakeholders via competitions for capital deployment, energy use reduction, or carbon emissions mitigation.
• The strategy that the Carbon War Room has applied most recently is to build consortia of companies that provide compatible services in such a way that the consortia are collectively able to offer turnkey solutions, including technology, contracting, financing, and insurance.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Demand Aggregation 51
It is the hope of the Carbon War Room that this guide provides a city In the United Kingdom, the government has sustainability officer or asset owner with the tools to implement individual established the Better Buildings Partnership, which policy measures, technology improvements, or financing solutions. But in “is an exclusive collaboration of London’s leading order to achieve widespread adoption of energy efficiency, it is important commercial property owners and allied organizations, to also pursue aggressive marketing and outreach programs in order to help supported by the Mayor of London and the Greater aggregate demand. London Authority”. Its goal is to create solutions for the commercial sector that will allow London to One way to do this is through targeted convenings. For example, the Carbon meet the Mayor’s target of a 60 percent reduction 70 War Room has developed a concept called Deal Days in which a municipality in CO2 emissions by 2025. Other cities throughout partners with a large property owner and together they bring to the event the world, including Toronto and Sydney, are also commercial and municipal building owners representing a minimum of adopting the Better Building Partnership model. 100,000,000 square feet. The Carbon War Room offers specific and well- vetted solutions that will provide the greatest benefits to the asset owners. Vendor presentations are done without the companies’ competitors in the room so that stakeholders feel comfortable speaking candidly.
Cities have also begun to adopt similar models for disseminating information to stakeholders and bolstering support for energy efficiency. Massachusetts held an event in January 2012 called Mobilize Energy Efficiency in America, which was a series of symposium-style meetings aimed at stimulating economic activity through energy efficiency by Cities can use encouraging open communication and collaboration among energy efficiency stakeholders.E mphasis was placed on how attendees can challenges and participate in and utilize resources from the Department of Energy’s Better Buildings Challenge. convenings to
Other cities have begun to engage building owners through bolster community challenges and competitions. An exciting example of this was Richmond, Virginia’s Earth Day Energy Challenge, a project of engagement in the Richmond Region Energy Alliance (RREA). This program efficiency and encouraged homeowners in the Richmond metropolitan area to take a free 22-question online evaluation to learn about their home’s sustainability energy usage, which helped them to understand their home’s relative performance and find out what they could do to improve its energy efficiency and lower their energy bills.RREA incentivized participation by entering each participant into a draw to win one of five free home energy assessments from an RREA-qualified contractor. This program provided a fun and interactive way for residents and neighborhoods to actively engage in energy efficiency planning for their homes.
The United States government may establish similar challenges in the commercial or municipal sectors in order to drive the market towards overcoming barriers and implementing projects. The US Department of Energy administers the Better Buildings Challenge, which “supports commercial and industrial building owners by providing technical assistance and proven solutions to energy efficiency.T he program also provides a forum for matching partners and allies to enhance collaboration and problem solve in energy efficiency.” Partners and allies involved in the challenge represent 2 billion square feet of committed properties, more than 300 manufacturing facilities, and $2 billion in financing through allies.69 Over 40 municipalities are currently enrolled in the challenge, including Atlanta, Chicago, Denver, Houston, Seattle and Washington, DC.
69 US DOE Energy Efficiency and Renewable Energy. Better Buildings Challenge. US Department of Energy. July 20, 2012. http://www4.eere.energy.gov/challenge/ 70 “Cutting CO2 in Commercial Property.” Better Buildings Partnership. City of London. July 20, 2012. http://www.betterbuildingspartnership.co.uk/home/
www.carbonwarroom.com 52 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS eoul)
Notes From the Field S Wellington, New Zealand
“New Zealand is often referred to as the land of plenty. However, one It is exciting for communities to develop these e Center, m
thing that we do not have in abundance is warm, energy-efficient types of programs because they provide triple o homes. Decades of inadequate building codes resulted in an estimated bottom line benefits. The programs help property H el 900,000 homes with substandard insulation (there are 1.6 million owners save money, they reduce harmful greenhouse d homes in total in New Zealand). A successful government program gas emissions and improve environmental quality, providing grants for insulation has made a significant dent in the and they have been shown to build community sung Mo
problem. More than 150,000 homes have received an insulation and to create jobs. According to a recent report, m a S
retrofit grant since 2009. But the program only addresses ceiling and “increased building retrofits could create more than (
under-floor insulation and there is no guarantee it will continue past 3.3 million new direct and indirect cumulative job years AA A October 2013. Many Kiwi households also still struggle to understand (excluding induced) in the United States economy.”71 D NA Several cities have decided to capitalize on this by the basics of energy efficiency. y establishing employment programs to engage workers In Wellington—the capital city of New Zealand—the City Council in weatherization, retrofit, and renovation projects. For ture b has developed the Home Energy Saver Program to help households instance, EMBERS Green Renovations in Vancouver is c
cut energy bills and make their homes healthier. The program was a non-profit, socially responsible business providing hite c designed to remove barriers to taking action on energy efficiency by energy-efficient solutions and home renovations.A s Y. ar Y.
empowering the household with information. Households—owners or part of its work, the company provides job training for H renters—are eligible for a free, two-hour home assessment. During the inner-city workers and then hires them to undertake P assessment, the assessor does a complete walkthrough of the home weatherization work. This type of program can be with the occupants. The assessor looks at insulation levels, sources particularly attractive to municipalities that have HOTOGRA
of moisture, shower flow rates, ventilation and heating. The assessor been hit hard by the recession and that suffer from P then compiles a simple action plan that is tailored and prioritized to diminishing construction industries. the household’s needs. The assessor can also supply and install small HORNER energy-efficient measures on the spot including energy-efficient
lighting and low-flow shower roses. OHN : J
AGE M
After just over 18 months, we are extremely pleased with the results I of the program. For every dollar the council spends on the program, we are leveraging three dollars of spend from government grants and the household toward energy efficiency retrofits. We have completed nearly 800 home assessments and we have received overwhelming positive feedback from customers about the program. We are finding at least 50 percent will get something done on the spot and our follow-up survey confirms that 90 percent of households took some form of action as a result of the assessor’s advice.
The key to the program’s success is that it directly involves the homeowner. The homeowner gets to understand the issues with their home and they are given the options and tools to take action. For the program to build on its early achievements, we will need to continue to find new and improved ways to engage the homeowner to make taking action simple and affordable.”
Zach Rissel, Senior Policy Advisor, Wellington City Council
71 Baker, Jake et al. United States Building Energy Efficiency Retrofits. Rep. Ed. Mark Fulton. Rockefeller Foundation & DB Climate Change Advisors. 2012.
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www.carbonwarroom.com 54 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
In reflecting on three years of project work, the Carbon War Room thought it would be helpful to summarize Lessons three of the biggest lessons learned along the way, with the hope that those lessons will accelerate the learning curve for other market actors. Lesson 1: Beware of “One Size Fits All” Learned When the Carbon War Room launched the Green Capital Global Challenge at the Vancouver Olympics, the operation was envisaged as one that would broker private capital investment into residential Property Assessed Clean Energy (PACE) programs, initially in the US, and subsequently more globally. The Federal Housing Finance Agency letters in May 2010 effectively negated AP CE for residential properties— an action that proved critical to throttling progress. In the subsequent months, the Carbon War Room was forced to pivot and contemplate how PACE could be retooled for the commercial sector. While the Carbon War Room continues to hold a positive outlook on the various forms of PACE discussed in this paper, its attempt to export the PACE structure to certain European municipalities also proved more difficult than anticipated.T he takeaway from this experience is that PACE—like any other financial tool—is one of a myriad of options that policy makers, financiers, project developers, and real estate owners should consider.
Since each building has its own unique envelope, equipment, operations, lease structures, and ownership needs, there will never be one financial mechanism that will be appropriate for all buildings. We should think of the technology, policy, and financial tools highlighted in this guide as a Swiss Army suite of solutions and resist our urge to let “the perfect be the enemy of the good”. Lesson 2: Demand Stimulation and Aggregation is Key Often treated as an afterthought, with a mentality of “if we build it they will come,” marketing and promotion of energy efficiency has so far not created the demand pull that the energy effficiency industry needs.T he problem of insufficient demand has in clear examples been attributed to a number of factors, including but not limited to:
• Marketing/communication: The pitch has too often been a technical, product-focused sell, rather than considering the buyer benefit and the service offer.
• Budget: When governments and local entities embark on an EEBE program, budgets for communication are most often severely restricted.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Lessons Learned 55
• Language: How do we reorient our language to address the needs, wants, substantial investment of resources and expertise and interests of asset owners? Terms like “efficiency”, “audit” and “retrofit” from the private sector program operator. Ultimately, do not naturally stimulate consumer interest. without deep local investment, staffing and commitment, a program cannot succeed. • Evidence base: Many asset owners may be positively disposed to “being green” but need convincing on the economics. Recent research that • Information is key: Additionally, ensuring that suggests that buildings with high energy efficiency ratings are more likely to all municipal stakeholders were up to speed and have high occupancy rates, and higher rents, has been challenged by some. educated about the nuances of PACE transpired to be more challenging than initially anticipated. Municipal stakeholders, lacking the right information Lesson 3: Risk Is Not Adequately Quantified, (or worse, receiving misinformation in some cases), Mitigated or Priced have stalled or delayed programs across the US. Focusing on economic benefits as primary drivers Running across the systemic barriers discussed previously in this guide, the and environmental benefits second has been a perception that energy efficiency measures are “risky” is ubiquitous. successful tactic in overcoming some of these barriers. The uncertainty with regards to savings makes it difficult for capital providers to lend based on the projected energy savings—unless the counter party has • Diversified and local financing:I n terms of financing, a sufficiently attractive credit profile, which is often not the case if the building the Carbon War Room originally built the PCC around a ownership has been set up as a Special Purpose Vehicles (SPV) or Limited single, large-scale financial partner. When that partner Liability Corporation (LLC) with little or no collateral. Insurance products like pulled back from PACE and the PCC, the partnership Energi’s Energy Savings Warranty Program and mechanisms like assessment effectively dissolved,T he fund administrator needed finance and on-bill repayment represent promising innovations that could limit to rapidly retool its approach, causing some delays. the risk exposure. The fund administrator responded by replacing its sole financial partner strategy with one that leverages Broad diffusion of successful projects and case studies will increase the a diverse set of local and global financial partners evidence base and, in turn, increase the comfort of all within the sector to to provide more program stability and, ultimately, a press ahead with retrofits. stronger position from which to fund projects.
• White vans now moving: Despite the delays in From Concept to Deployment: getting these PACE districts established, projects are A Progress Update on the PACE now being funded and the “white vans are moving”. Commercial Consortium T hanks to the persistence of the consortium members, most notably Ygrene Energy Fund and the City of In September 2011, the Carbon War Room announced the formation of the Sacramento—the Clean Energy Sacramento program PACE Commercial Consortium (PCC) in partnership with Ygrene Energy Fund, is now available to commercial property owners and Energi, and Lockheed Martin with an expected commitment of $650 million is delivering environmental and financial returns. For from Barclays Capital to fund retrofit projects in the Miami and Sacramento example, the district’s first project, 520 Capitol Mall, markets. One of the first market milestones took place when PCC member is already saving $47,000 a year on energy costs as a Ygrene Energy Fund partnered with the City of Sacramento to create the Clean result of a $526,000 energy upgrade program. Only Energy Sacramento program. The program is a public-private partnership three months after deployment, over $1 million in that brings private capital and management together with the city to achieve retrofit projects have completed construction and over broad-scale commercial and residential building upgrades, with the objective $10 million in applications have been submitted. These of achieving dramatic GHG reductions while simultaneously stimulating the types of building upgrades, completed en masse local economy. With the experience of the program formation and launch now across the city of Sacramento, will play a significant behind them, the specific learnings achieved in launching the program were role in reaching Sacramento Mayor Kevin Johnson’s the following: goal to upgrade 25 percent of buildings by 2020. A chieving that goal could eliminate as much as 200,000 • Getting the details right: The consortium found the municipal and legal metric tons of carbon emissions, create up to 22,000 process to get final bond documents and authorization to be complicated jobs, and provide up to $3.8 billion in privately funded and time-consuming—even more so than program administrators initially economic stimulus.72 Miami is next on the horizon, with forecasted. To launch a program that works at scale requires deep an expected launch in the summer of 2013. commitment from both public and private partners, accompanied by
72 According to an economic model developed by independent research firm ECONorthwest. http://pacenow.org/wp- content/uploads/2012/08/Economic-Impact-Analysis-of-Property-Assessed-Clean-Energy-Programs-PACE.pdf
www.carbonwarroom.com 56 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Conclusion
Energy efficiency in the built environment provides the opportunity to abate gigaton
levels of CO2e while generating hundreds of billions of dollars of profits
www.carbonwarroom.com Carbon War Room Research Report – 2013 Conclusion 57
Conclusion
Energy efficiency is arguably the most profitable carbon abatement strategies we have at our disposal that neither requires changes in policy nor depends upon subsidies. The United States currently spends over $400 billion each year to power its homes and commercial buildings and this energy is responsible for almost 73 40 percent of the nation’s CO2 emissions. This represents a massive opportunity to cut costs and reduce emissions. For example, the US Department of Energy estimates that commercial buildings could be made up to 80 percent more efficient using new and existing technologies.74 HSBC has estimated the total size of the current energy efficiency for buildings market to be $87 billion per year today, and the potential market in 2020 to be $245 billion per year globally.75 Because of this tremendous potential for market growth, it is clear that energy efficiency measures represent one of the most promising opportunities to profitably reduce society’s energy
consumption and CO2 emissions.
In terms of steps that can be taken today to capitalize on this opportunity, it has often been said that what is not measured cannot be managed. Simply increasing awareness of current energy use among building occupants often results in incremental energy savings. As our technology section illustrated, there is a logical progression for evaluating the energy consumption of a building (or portfolio of buildings) that allows oston) B for building owners and tenants to benefit from
ing, energy efficiency improvements. Deeper savings can d be captured by building owners that do not want uil B to rely on their own capital thanks to a multitude of available financial options, ranging from performance llen guarantees, assessment finance, on-bill, andE nergy cA Savings Agreements. Policy makers have the capacity (Ma to move beyond the boom/bust cycle of perverse dA e short-term incentives like rebates and, instead, create c i a framework for capital and technology entrepreneurs Off
y to offer third-party financed solutions—as described in our section on policy. ture b c With this guide, the Carbon War Room hopes to provide hite
c the background and context required for understanding how to implement energy efficiency programs. Energy Y. ar Y.
H efficiency is the opportunity of our generation and P one that will be met with the leadership of the many stakeholders who have engaged with the Carbon War
HOTOGRA Room during this process. P
HORNER 73 Dept. of Energy. http://www1.eere.energy.gov/buildings/about.html 74 Dept. of Energy. October 2008. http://energy.gov/articles/obama-administration-
OHN launches-new-energy-efficiency-efforts : J 75 Robins, Nick, Charanjit Singh, Robert Clover, Zoe Knight, and James Magness.
AGE “Sizing the Climate Economy.” M
I Rep. N.p.: HSBC Global Research. 2010.
www.carbonwarroom.com 58 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Works Cited
www.carbonwarroom.com Carbon War Room Research Report – 2013 Works Cited 59
Industry Resources
American Council for an Energy-Efficient Clinton Climate Initiative (CCI) Natural Resources Defense Council Economy (ACEEE) Building on President Clinton’s long-standing (NRDC)—Center for Market Innovation The American Council for an Energy-Efficient commitment to the environment, the Clinton The Natural Resources Defense Council E conomy is a non-profit, 501(c)(3) organization Climate Initiative (CCI) is implementing is a leading US NGO focused on oceans, that acts as a catalyst to advance energy programs that create and advance solutions endangered wildlife, and mitigating efficiency policies, programs, technologies, to the root causes of climate change—while climate change. Through its Center for investments, and behaviors. ACEEE carries also helping to reduce our reliance on oil, Market Innovation, the NRDC is attempting out its mission by: “conducting in-depth saving money for individuals and governments, to move private finance into energy technical and policy analyses, advising policy creating jobs, and growing economies. CCI, in efficiency retrofits. makers and program managers, convening partnership with the C40 Climate Leadership conferences and workshops, and educating Group (C40), focuses on helping large cities to Rocky Mountain Institute (RMI) businesses and consumers.” reduce their carbon emissions. Its partnerships The Rocky Mountain Institute is an with Microsoft, ICLEI, and Autodesk provide independent NGO that focuses on Better Buildings Partnership (BBP) software and expertise that help cities to researching market-based solutions in The Better Buildings Partnership (BBP) is a measure their GHG emissions. the built environment, energy resources, collaboration of London’s leading commercial mobility, and vehicle efficiency.R MI works property owners and allied organizations, Efficiency Cities Network (ECN) extensively with the private sector, as well as supported by the Mayor of London and The Efficiency Cities Network provides the with civil society and government, to apply the Greater London Authority. It aims to opportunity for government staff, researchers, the framework of natural capitalism, which develop solutions capable of improving the technical providers, and NGOs to share their emphasizes integrative design, advanced sustainability of London’s existing commercial ideas and experiences on how to achieve technologies, and intelligent markets. building stock and achieve substantial CO2 energy efficiency at scale.T he goal of ECN savings in support of the Mayor’s target of a is to learn the most effective and efficient Southeastern Energy Efficiency Alliance 60 percent reduction in emissions by 2025. ways to increase the adoption of retrofit (SEEA) technologies. The Southeastern Energy Efficiency Alliance Built Environment Coalition (BEC) promotes energy efficiency programs in the The Built Environment Coalition was formed Environmental Defense Fund (EDF) southeast of the US by bringing together to address the widening gap between The Environmental Defense Fund is one of industry and government officials and communities’ needs to improve sustainability the largest climate change NGOs operating in pooling regional resources. SEEA creates and disaster resiliency and their abilities to the United States. Its mission is “to preserve policy mechanisms that incentivize meet those needs. The BEC addresses this gap the natural systems on which all life depends”. investment in energy efficiency and works by employing community-based evaluations Specifically, EDF supports cleaner energy with stakeholders to develop cost-effective and targeted field tests of new solutions sources and greater energy efficiency in and feasible regional programs that lower in partnership with government agencies, order to cut carbon pollution and help to costs through economies of scale. companies and non-profits to develop stabilize the climate. community capacity. The European Alliance of Companies for European Council for an Energy Efficient Energy Efficiency in Buildings (EuroACE) Center for American Progress (CAP) Economy (ECEEE) The European Alliance of Companies for The Center for American Progress is an The European Council for an Energy Efficient Energy Efficiency in Buildings aims “to help NGO that both lobbies governments and Economy offers governments, industry, Europe move towards a more sustainable disseminates research. The organization research institutes, and citizen organizations pattern of energy use in buildings” to reduce focuses on a myriad of issues, ranging from a unique resource of evidence-based carbon dioxide emissions and help the national security to media. Its environmental knowledge and reliable information. It actively European Union meet its commitments initiatives focus on low-carbon policies that participates in the European policy-making under the Kyoto protocol. EuroACE is made encourage comprehensive upgrades in energy process and acts as an informational resource up of more than 20 member companies, efficiency, as well as environmentally safe and through its website. representing European manufacturers, sustainable energy diversification. distributors and installers of energy-saving ICLEI goods and services. Ceres ICLEI is a membership association of local Ceres is an advocate for sustainability governments committed to advancing climate leadership. Ceres mobilizes a powerful network protection and sustainable development. of investors, companies and public interest It provides technical, legal, and program groups to accelerate and expand the adoption administration resources to local governments of sustainable business practices and solutions to implement energy efficiency and other to build a healthy global economy. projects related to climate change.
www.carbonwarroom.com 60 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
White papers
1. Baker, Jake, et al. “United States Building 5. Eichholtz, Piet, Nils Kok, and John 9. Hayes, Sara, Steven Nadel, Chris Energy Efficiency Retrofits.” Rep. Ed. M. Quigley. “The Economics of Green Granada, and Kathryn Hottel. “What Mark Fulton. Rockefeller Foundation & DB Building.” Working paper no. W10–003. Have We Learned from Energy Efficiency Climate Change Advisors. 2012. Fisher Center for Real Estate and Urban Financing Programs.” Rep. no. U115. In this joint report, the authors analyze the Economics & UC Berkeley. 2011. Washington, DC: American Council for an investment potential for energy efficiency in The authors analyze the economics Energy-Efficient Economy. 2011. the United States and the implications that of incremental improvements in the This ACEEE report provides an overview this has for related policy. The report focuses sustainability of buildings, concluding of existing financing mechanisms for on how to achieve the most robust economic that there are many economic benefits to energy efficiency projects, with the goal benefits from energy efficiency investment. “greening” a building beyond the energy of improving upon these mechanisms and savings and reduced carbon emissions. developing a set of tools that will help asset 2. Buonicore, Anthony J. “Emerging Best owners and managers increase the pace of Practice for Underwriting Commercially 6. Energy Upgrade California, and Energy the implementation of these projects. Attractive Energy Efficiency Loans.” Independence. “Property Assessed Clean Working paper no. 12–002. N.p.: “Building Energy (PACE) Replication Guidance 10. Kats, Greg, et al. “Energy Efficiency Energy Performance Assessment News.” Package for Local Governments.” Rep. Financing—Models and Strategies.” Rep. 2012. Sacramento: State of California. 2012. Capital E & The Energy Foundation. 2011. This paper reviews market-ready, This manual will assist local governments In this report, the authors present research commercially attractive financing in their efforts to establish and operate on the implementation, benefits, and mechanisms and the emerging best practices Property Assessed Clean Energy (PACE) challenges of all existing financing strategies needed to facilitate proper underwriting programs. It provides a general overview and models for energy efficiency projects. of energy efficiency loans, with the goal of PACE and the considerations for local of accelerating the deep energy efficiency governments contemplating PACE program 11. Machinchick, Tom, and Eric Bloom. retrofit market. design and administration. “Building Management Systems— Hardware, Software, and Services for 3. Copithorne, Brad. “Creating Financing 7. Fulton, Mark, ed. “United States the Intelligent Monitoring, Management, Markets for Energy Efficiency Projects in Building Energy Efficiency Retrofits: and Control of Energy in Commercial Commercial Buildings.” Environmental Market Sizing and Financing Models.” Buildings: Market Analysis and Forecasts.” Defense Fund. 2011. Rep. N.p.: Deutsche Bank Group. 2012. Rep. Pike Research. 2012. This short document provides a concise This paper establishes the potential size of This Pike Research report provides a overview of the market barriers to the retrofit market in the United States and comprehensive analysis of building investment in energy efficiency projects, examines the emergence of new financing technology solutions for increasing energy and describes a two-part solution that will models that offer the promise of overcoming efficiency in existing buildings, and provides overcome these barriers. historical barriers and unlocking the true a market analysis and forecast for these potential of this market. technologies. 4. Dyer, Colin, et al. “A Profitable and Resource Efficient Future: Catalyzing 8. Granade, Hannah, Jon Creyts, 12. Nock, Levin, and Clint Wheelock. Retrofit Financing and Investing in Anton Derkach, Philip Farese, Scott “Energy Efficiency Retrofits for Commercial Real Estate.” Rep. Geneva: Nyquist, and Ken Ostrowski. “Unlocking Commercial and Public Buildings.” Rep. World Economic Forum. 2011. Energy Efficiency in the US Economy.” Pike Research. 2010. The report equips policy makers and Rep. McKinsey Global Energy and This document enumerates the advantages industry leaders with the information Materials. 2009. and savings potentials of retrofitting existing needed to build and scale retrofit markets This report provides an assessment of buildings; it explains financing mechanisms, around the world. It highlights the business the political and economic barriers to legal and policy factors, and demand drivers potential waiting to be tapped by multiple widespread implementation of energy in this market; and it provides case studies industries and underscores the acute need efficiency projects, and concludes that and market forecasts for the retrofit market for government leaders to take action now. energy efficiency offers a vast, low-cost in commercial and public buildings. resource for the US, but only if the nation can create comprehensive and innovative approaches to unlock it.
www.carbonwarroom.com Carbon War Room Research Report – 2013 Notes 61
13. Prindle, William R. “From Shop Floor to Top Floor: Best Business Practices in Energy Efficiency.” Rep. Pew Center on Global Climate Change. 2010. This report stems from a historic shift in business leaders’ perceptions of energy and climate change, and documents leading- edge energy efficiency strategies, distilling the best practices and providing guidance and resources for other businesses choosing this path.
14. Smithwood, Brandon. “Power Factor: Institutional Investors’ Policy Priorities Can Bring Energy Efficiency to Scale.” CERES. 2013 This paper argues that energy efficiency offers an opportunity for institutional investors such as pension funds, insurance companies, and mutual funds to manage the risks of climate change while earning a competitive rate of return on their investment and the utility, demand producing, and finance enable policy drivers that can foster a secondary market and encourage institutional investments into retrofits.
15. Sweatman, Peter, and Katrina Managan. “Financing Energy Efficiency Building Retrofits.” Rep. Madrid: Climate Strategy & Partners. 2010. This report focuses on cost-effective opportunities to improve the energy efficiency of the residential and commercial building stock in Spain. The analysis reviews progress to date in the US, UK, and Spain and develops a new business model that the authors believe can greatly accelerate the pace of energy efficiency retrofit uptake in various sectors.
www.carbonwarroom.com 62 HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS
www.carbonwarroom.com About The Carbon War Room ACKNOWLEDGEMENTS
C arbon War Room works on breaking N ot long after the inception of the Carbon War Room, its work on down market barriers for capital to flow to Energy Efficiency in the Built Environment commenced under the entrepreneurial solutions to climate change, by Green Capital Global Challenge, a project focused on catalyzing the employing a sector-based approach focusing on movement of large-scale capital into municipalities and their buildings the solutions that make economic sense right now. efficiency endeavors. This project was initiated and led by Murat We target the movement of institutional capital Armbruster, who in January 2013 returned to the private sector, into a working marketplace and the elimination with the launch of a new company, CoEfficient. His colleague JoshuaK agan of market inefficiencies (in the form of insufficient has since assumed the lead role in the Carbon War Room’s work on energy information and high transaction costs, among efficiency in buildings. others). Policy and technology are necessary conditions to the solution, however, they are The Carbon War Room would like to extend a special thanks to all of the neither sufficient nor the bottleneck to progress. organizations and individuals with which it has collaborated over the past three years. The information in this manual is derived from our interactions with a Our vision is to see markets functioning properly variety of municipalities and industry players, and its creation was only possible and clean technology successfully scaling to because of all of the exciting work that these entities are doing, and their promote climate wealth, business and economic willingness to share their experience and insights. growth. In the role of a climate wealth catalyst, Carbon War Room focuses on areas where a In particular, the Carbon War Room would like to thank the following sector-by-sector approach to climate change teams from the Green Capital Global Challenge Cities can be applied to generate gigaton-scale carbon Atlanta | Babylon | Baltimore | Birmingham | Burlington | Charleston | savings. We seek to complement existing efforts Charlottesville | Chicago | Colombo | Copenhagen | Denver | Gainesville | and organisations, leveraging our convening Kathmandu | London | Melbourne | Miami | Nashville | New Orleans | New power, our market-driven, solutions-oriented York City | Portland | Richmond | Rotterdam | Sacramento focus, and our powerful global network to | San Antonio | San Francisco | Toronto | Vancouver | Vilnius | Washington, develop and implement catalytic change. DC | Wellington
Individual contributors to this document Bill Updike | Bob Hinkle | Brad Copithorne | Christoph Harwood Dave Good | Erik Larson | Hurrian Peyman | John Geyer | Julia Parzen Marshall Duer-Balkind | Megan McCarthy | Peter Sweatman | Rich Chien Sean Neil | Shelley Cohen | Woolsey Mckernon | Zach Rissel
Editors Hilary McMahon | Tessa Lee
Partners & consulted organizations Abundant Power | Ameresco | Autogrid | Better Buildings Partnership | Building Energy | Building IQ | Climate Strategy | DENEFF | Deutsche Bank | Environmental Defense Fund | Energi | Deutsche Bank | Green City Finance | Hannover Re | Honest Buildings | ICLEI | Lockheed Martin | Lutron | Marksman Consulting | Metrus Energy | Mitsubishi Estates | NRDC | NYCEEC | Project Group Asia | PwC | Retroficiency | SAIC | SCIenergy | SDCL | SEEA | SRS | Tanager Group | Urban Sustainability Network | Viridity | Ygrene Energy Fund
John Horner Photography John Horner is an Architectural Photographer living in the Boston area. he works nationally and internationally to document the built environment. his work is frequently published in books and magazines such as Dwell, Architecture, Elle decor, Interior + Design, Metropolis, Frame, Design New England, Boston, Boston Home, The Boston Globe, The New York Times, and many others. In addition, his work has won numerous awards form the AIA and various design organizations. he is currently working on a long term project to produce the images for the new MIT Campus Guide to be published in 2015 by the Princeton Architectural Press. More of his work can be seen at www.johnhornerphotography.com.
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